Thank you for standing by. This is the conference operator. Welcome to the Westport Fuel Systems Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. As a reminder, all participants are in listen-only mode. The conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Shawn Severson with alphaDIRECT Advisors, Westport's Investor Relations representatives. Please go ahead, Mr. Severson.

Thank you and good afternoon, everyone. Welcome to Westport Fuel Systems' fourth 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 to 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 are based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statement, so you are cautioned not to place undue reliance on those 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 our conference call to review Westport Fuel Systems Q4 and yearend 2019 results. 2019 was a great year a pivotal year for Westport Fuel Systems. Each of our businesses delivered improved operating results on the topline and on the bottom line. I'm proud that in 2019, we made another big step in our transformation into a profitable and sustainable company, building on our prior year improvements with another year of double digit percentage gains. Westport Fuel Systems portfolio of clean technology solutions distributed to markets around the world and supporting our light-duty and heavy-duty OEM customers and partners is reducing the environmental impact of transportation. And our products are doing so in a cost effective way. This is critical as it enables our technologies to reach the scale required in our industry and for our environment. There have been a number of important market developments since our Q3 call, and I'll walk through these in a moment. But first I want to share the headline financial results shown in the next slide. I'm pleased and proud of our latest achievements. Continued sales growth of HPDI combined with the strength in our independent aftermarket and light-duty OEM businesses resulted in annual revenue of $305 million, up 13% over 2018 and up 33% from 2017. Net income from continuing operations increased by $41 million year-over-year, that is in 2018 we lost $40.8 million, while in 2019 we moved to the plus side earning $0.2 million. It's a big accomplishment and a very good step. We recorded our seventh consecutive quarter of positive adjusted EBITDA and we delivered our first full year of positive EBITDA. These results are evidence that our clean cost-effective market ready technologies are the answer to the increasing global demand, for sustainable transportation. For…

Thank you, David. As David outlined from the start, Westport Fuel Systems had strong financial performance during fiscal year 2019. For the year revenue increased by $35 million to $305 million, a 13% increase driven mainly by significant growth in our OEM business of $29.2 million, primarily from higher HPDI product sales in Europe, and development revenues. And our independent aftermarket business generated a year-over-year increase of $5.8 million, due to strong demand for its aftermarket and delayed OEM products. Although gross margins increased by approximately 6% to $68 million, our gross margin percentage softened due to the increasing mix of lower margin HPDI sales. Besides increased gross margin, much of our earnings improvement in 2019 was also due to the $9.4 million decrease in SG&A expenses in 2019 compared to the prior year, mainly from the impact of lower Euro and Canadian dollar average exchange rates, lower costs related to the SEC investigation year-over-year and lower professional fees. Further, we had a $4 million increase in equity income from CWI from strong performance in the joint venture. CWI had a 13% year-over-year increase in revenues to $362 million and lower warranty adjustments that led to a 17% increase in net income of $53 million, of which $26.6 million was to our account. At the end of the day, we generated the first net income from continuing operations of $0.2 million compared to a loss of $40.8 million in the prior year. Looking at our cash flows. We generated adjusted operating cash flow of $9.3 million compared to negative $4.2 million in the prior year, driven by the better operating results, but partially offset by negative working capital changes. Financial discipline is a priority for us and we continue to ensure cash flow generated as allocated to investing in HPDI,…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Eric Stine. Please go ahead.

Hi, David. Hi, Richard.

Hi, Eric.

So, I certainly can appreciate the uncertainty and I get the outlook. But just in the context of that, I would love to hear about some of the priorities and just maybe where your confidence lies in the four that you've provided, whether you rank them or just talk about them a little bit. On one hand, you've got uncertainty near-term, on the other hand, you've got some confidence, certainly over the long-term but even in 2020, as you pointed out sustained growth and profitability in the light-duty business?

Yes, glad to talk about it, Eric, and good to have you on the call. So, as a general premise, I feel very good about our business, all the fundamentals that we talked about in this call and prior calls and conferences before. I believe they're there and actually strengthening. So we talked about more fuel stations in Europe. We talked about this regulation coming closer and closer. Another factor is that just to give an example in the aftermarket business, all those shift of sales from diesel powered vehicles, passenger vehicles to gasoline powered vehicles, as people get move away from diesel, that creates more vehicles that we can convert to natural gas and LPG. And so the fundamentals of our business are in my view, very strong, and my outlook is great. The challenge for us of course is we've got a plant closed in Italy right now and I expect to open that plant back up after a two week shut down. But I don't know that, I don't even know that two weeks from now. I have to see how the conditions develop in the marketplace, and the people are able to come back to our factory and do the work that needs to be done. And when we expect to do that we don't know it. And I think, frankly, in the grand scheme of things, the macroeconomic situation in the world today is so uncertain, in terms of what kind of responses we're going to get from the government and how they're going to spur the economy to return to the robust level of commerce, that drove our order book that we still have today. We just don't know what our order book looks like in the future as a result of that. And if I go far afield to a place like China, I think they've gone through their own phase of COVID-19 and all the disruption that caused. But their need to transport goods in that country will not abate. They have invested heavily in LNG infrastructure and the HPDI product that we will launch there, in short order should be really great in the marketplace and we expect big things from it. Again, probably not a hockey stick curve on that right away. Even in China, people are going to buy the truck, evaluate the truck and then before they buy two or five or 10 or 20. So there's still that commercial vehicle adoption curve, which isn't a step function change. And so those are kind of all the things I think about, when I think about where the future look like, and where do I see us going.

Yes. No, understood. Understood. There's a lot of a lot of uncertainty as kind of an understatement. But maybe just on China, and obviously things complicated by what's going on. But maybe, I mean, could you just talk about maybe some of the things and maybe it's prior to the last couple of months, but some of the things even though certification not yet in hand, what you're doing in the market what Weichai is doing in the market? And just some of the feedback or thoughts you're getting from fleets truck OEMs in anticipation of this engine?

Yes, I think there is heavy anticipation and we're working through our joint venture and with a number of OEMs to have them see the product, feel the product and be ready for the product. So that is ongoing work. And they have the same anticipation that, let's say, we do on this call regarding getting the certification done, starting the production sales, and seeing the product in the marketplace to see what the end users the fleets and the individual owner operators do with respect to buying the product, and what does that adoption cycle look like in China. Is it different than we've experienced in other markets? And we have seen with the market for natural gas commercial trucks in China, we've seen some significant nonlinearities historically, where basically the market is jumped by 30%, 40%, 50% based on, the kind of economy they have there and the signals they give to the economy in terms of what people should do and what trucks they should buy and what feels available. So that also could happen with HPDI. I'm not predicting that or saying that's going to happen this year, but I'm just saying, if you look at the history of natural gas trucking in China, the growth rates have been very substantial. And I think you are quite well aware of what's happened in the marketplace there.

Yes. Absolutely. Maybe last one from me, just on the cost side. I know you've cut OpEx quite a bit just -- are there may be some additional levers that you can pull there just in response to the current environment?

Yes. So I think as a general premise, we have been working hard at making sure we find every bit of cost to bring out of the company as possible. I think we've done really good work on that, as have my predecessors. So this is not a new activity for us, and we will continue to do it. I do think we're not done. And I won't go into specifics of things that I expect to achieve here there the other, but it's an ongoing effort for us and we expect that we will continue that in 2020.

Okay, thanks.

Thank you, Eric.

Thank you. The next question comes from Colin Rusch. Please go ahead.

Thanks so much. Guys, I know it's early days, but can you talk a little bit about what you're seeing from the supply chain and banks with your working capital? Are you being able to collect on yearend? And what are your suppliers looking for from you in terms of getting their payables paid? And then are you seeing any support mechanisms emerging yet from Italian or euro banks on that front?

Well, I can talk a little bit about the supply base Colin and then I'll hand it over to Richard to talk about the capital markets a bit and what we're seeing with our banks and so forth. So on the supply side, we took early action across our operations to advance our orders and build up some inventories. So that was happening already in early January when we heard about the activities, or the outbreak, if you will, in China. So, we have a fair number of components that do come from China. And that’s an important part of our supply base. As you know, when you're making product, if you're missing one piece, you can't make the product. So, we took action to build up those inventories and that's worked well for us. We have not had to stop production or slow down production, or short any customer because of a lack of material. So, so far so good. I do believe it's still early days, as you can see in this COVID-19 epidemic, it's not a situation that is one week and done. We've been talking about this now since early days of January and I think we've got some time still to go. And so it's every day we have to work on this with our suppliers. But I would say no adverse conditions so far in total. But really, we had to stop our production in our plant in Russia, not because of a lack of material, but because it wasn't a healthy thing for our employees to be in the factory at the time.

Yes, I would just add, I agree. Go ahead Colin.

Yes. I'm more concerned with cash flow than availability of components. So if you could address that as you work through the bank support?

Yes. As of right now Colin, in terms of our relationships with vendors and everybody within kind of all our stakeholders, we haven't seen the pressure yet. So, everybody is sort of -- in terms of when we're receiving an account -- a trade receivable versus trade payable, we're sort of maintaining those relationships as we were before. So, there's nothing really significant yet. Not to say that that pressure will start happening, especially within -- with our businesses within Italy, there's very, we'll call it a structure of how things are flowing over there, where the community definitely is supporting each other. So, we haven't seen. We haven't been be a beneficiary or somebody or the recipient of any pain out of that process, as of right now. Just for the rest of the group and in terms of managing our working capital and our liquidity of the organization, I mean, that's one of the things that obviously, we were preparing for this, as the situation in Italy was unfolding, that we were responsible with regards to making sure that we were going to meet all our financial obligations, whether those were in our supply chain but also in our debt, that we're preparing ourselves to make sure that we can weather the storm.

And then, just would love a quick update, and I know it's probably not top of mind but the CWI relationship and any discussions or update that you have that you can share from the discussions with comments on how you move a forward with that agreement, that entity as you come to the end of this place?

Yes, Colin. It's the question that keeps coming back and I understand why. Unfortunately, at this juncture, I'm in the same situation that was before. We continue to have those discussions. And we have a very good working relationship with Cummins in those discussions. But I don't have anything that I can share at this point in time with respect to where we'll end up and how we'll come out in the end. I've talked about the different options that are in front of us, but I don't have any news to share. So sorry for that, but that's just a play rate at this point in time.

No, I just wanted to make sure. Thanks so much, guys.

Thank you, Colin.

Thank you. The next question comes from Sameer Joshi. Please go ahead.

Thanks guys, for taking my call. My question focuses on the Italy situation. You have one facility closed and the other two are operating. In terms of the parts that are being produced or assembled there, is there a bottleneck that has been caused because of this closure?

No, I would say not. So maybe just to characterize it, just to give you the kind of the geography of that situation, our plants in Brescia Italy is within a few number of kilometers of the epicenter where the outbreak was, less than an hour's drive and really that's northern Italy area is severely affected. I think you can read the news about that yourself. But the other plants that we have are further away and not so severely affected at this point in time. Not trying to minimize anything that’s actually going on there but actually, the regional differences are substantial. In terms of bottlenecks in either supply by us or to us, that hasn't been a problem. So we basically, actually, we were in the early days, let’s say, late days of January, early days of February. We're actually accelerating our deliveries in response to the news that was coming out as our customers were doing, like we did, trying to build up inventories to be more robust going forward through the crisis, if you will. And so we met all those requests wherever we could. And I think the team did just an absolutely fabulous job. But unfortunately, at the end of the day, we just couldn't keep running the plant, it wasn't helpful. There wasn't a healthy environment for our employees. And it was really a crisis situation, is aggressive situation in that part of the world. So that was the decision, that was taken. And we've been in touch with all of our suppliers and customers, everybody's well informed. And as Richard alluded to a moment ago, there's a real strong community in that part of the world, and everybody's helping each other as much as they can.

In terms of cost reductions, I know you've talked about them in context of operations. But given the uncertainty of future revenues, are there any other cost reduction efforts that are planned or [Indiscernible 33:04]?

Yes. I would say on the jump top on cost reduction, the one that comes top of mind to me and then maybe Rich do you want to jump in, is our cost reduction effort on our HPDI product. This really is tied directly to the volume growth. And so we're really excited about what we'll be able to do over the coming quarters with respect to improving the margins on that business. It's a lot of work, it doesn't happen overnight, but it's on our table to do and it's a priority for us.

It's sort of like an early question, in terms of gross margins, what we have seen is that as you are increasing HPDI sales, your volume pricing discounts and affecting gross margin. So how does that work in conjunction with these cost reduction efforts?

Yes. To start with, the growth has been good with our lead customer in Europe, but we have not yet been able to add the volume that we want to see out of our Chinese business. And so that will really I think, make a big difference. And so that's an important part of our business and something that we're looking forward to.

Okay, I’ll take my second question offline. Thanks.

Thanks, Sameer.

Thank you. The next question comes from Rob Brown. Please go ahead.

Hi. Just wanted to clarify the Brescia facilities, does that to supply your OEM business or do they supply some of the HPDI product out of there?

Yes. That plant is supplying OEM business for both light-duty and heavy-duty. So we did make our tank systems that we supply to our European customers at that facility.

Okay, good. Thanks for clarifying. And then, on the China HPDI ramp, realizing it's uncertain when you get that certification, but what steps sort of happen after you get certification? When does that hit the market? What are sort of the steps that need to follow once you get the certification?

Well, one of the things that's very different with this launch in China besides being a completely different market than the European market, in terms of being more well developed and receptive and available more refueling infrastructure. But I would say one of the most important things that's different, and that we therefore don't have a total feel on is that actually, our joint venture there makes engines and then we sell engines to truck manufacturers. And so there is this potential and we're doing the work now with multiple OEMs, that we could have multiple OEMs launching this product that competing with each other in real time. The launch curve could be a different launch curve than we experienced with Volvo, because there'll be a sum of a number of launch curves from different customers. So we have to see how that plays out over time. But that would be kind of a key difference that we see as an opportunity going forward.

Okay, good. That's excellent. And then I think in the in the prepared remarks, you mentioned LNG truck registrations in Europe you gave a number. Could you kind of clarify what that was and sort of, maybe the trend line there again?

Yes. So there's a chart in the materials that we've posted, that shows kind of the fleet of vehicles in Europe. And so we're up to like 11,000, I think a number, yes, 11,000 units on the roads basically. But what the other number that I gave was 4500 units, just in this past year that were registered, new registrations. And so I think that's giving you a good idea. And the need in that curve is very clear around 2017, 2018. We are really starting to see an expansion of the market in Europe as people start to adopt these trucks. And that comes from a couple of factors. One is more refueling infrastructure. It's been growing quite rapidly over the last couple of years as we talked about, and also more product available. So, back in the early days of LNG, back in the 2012, 2013, it was just a tobacco with our Spark-ignited product. But in the 2016, 2017, 2018 time we had the launch of our products HPDI with our customer, as well as Scania with their Spark-ignited products. And now you have more and more products getting in the market, more refueling infrastructure and a really nice trend line that we expect to follow and accelerate.

Okay, great. Thank you. I appreciate the color. I'll turn it over.

Thanks, Rob.

Thank you. [Operator instructions] The next question comes from Jeff Osborne. Please go ahead.

Good afternoon. A couple of questions on my end, going back to Italy. Can you just talk about other than Brescia the other two facilities? What do those make? And then are they reliant on products or any components coming out of Brescia?

Yes, there is some interdependency and we again tried to build up stock relative to that interdependency, as we saw that the closure was going to be required. But for the most part the plant in Cherasco is our aftermarket business in the large part, supplying components to LPG and doing our DOEM services for our customers, our OEM customers, as well as our plant in Albinea is a component supplier of injectors would probably, by market share the largest supplier of injectors for aftermarket kits around the world. So, we supply our own kits, plus we supply other company's kits. So, quite a few components coming out of that plant.

Got it. That's helpful. And then you mentioned that I think in the prepared remarks, referencing the European data from NGB Europe, that I think 55% of the market for CNG was Italy. Can you give us an update, just your broader light-duty vehicle mix across all different field types? How much is Italian centric demand?

Yes. Italy is a very important market for us, and there's no question about it. We are a dominant player in that market. It is the largest market for our CNG and LPG vehicles and therefore kits in the European Union. But there are other very important markets like Russia, Turkey, Poland, our business are very far away in Argentina is also a very important piece of the puzzle. So, there is other business and of course, we have a strong business in places like Germany and the Netherlands kind of in the Northern European region, especially with our prints product there, which is built in a different plant in the Netherlands.

Is it safe to say about half? Is that fair? I'm just trying to put it in perspective. If the total market is 55%, you're the leading player, give or take half?

I don't have a number for you. I'd like to come back to you on that one, Jeff.

Okay, no problem. And then the 44,510 trucks that were registered LNG based, I think a Iveco at their Analysts Day highlighted over 50% share. Obviously Scania has been around for a few years. Any sense on the market share, in year one or any thought process on how that evolves just given the competitive market over the next year or two?

Yes. So, general comments on that I don't have any specific market shares that I can share with you. I do believe a lot of that data is available, but I just don't have it handy myself to share with you. But what I would say is that, Spark-ignited products in Europe for natural gas and commercial trucking, and in China also but specifically we're talking Europe here, is well known. Iveco has been out there kind of leading the way and with that product in marketplace for coming up on 10 years now. And when Scania came in and joined, it was kind of from my perspective and the markets perspective, okay, here's another product like that, that we know, right? It's the same kind of product, something we know. But when HPDI comes out, it's like, oh, what's that? It's a little different. So, the adoption curve for that spin, I would say, not the same as you would with a Spark-ignited product because it's not so well-known, and it's something new and novel. We're about to get used to it. So I think there is that element of the adoption curve, that means, that we still have some acceleration left to do, I would say quite a bit with the HPDI product, [buy it] with our customer in Europe.

Is that more in your court or your launch customers or both? Just so unclear on that.

No, I think that's almost entirely on our customer. And what I expect in the marketplace it'll be interesting to see how it plays out. But right now, in Europe, the industry is creating the baseline for the CO2 standards. The baseline for CO2 standards being that 15% number and the 30% reduction that's due in 2030. These are going to be measured against the baseline that's being created now. So really kind of across the industry there from a mass perspective and a compliance perspective, there isn't a strong push that says, let's go sell a lot of low carbon products, because that just makes the future challenge even greater. So after June 30, of this year, it will be interesting to see how the market develops and how all the players act.

Got it. That's helpful. My last question is, I just wanted to try to drill down a little bit more on China. So you gave some incredibly helpful detail around the various tests, dyno emission, various vehicle testing, and then an administrative proceeding. And then you sort of characterize the processes, I believe you said almost done. I'm just curious, have you done all the three tests that you referenced? And are you in the middle of the administrative process? Or have you not done the test? It was unclear where we are in that journey?

Yes. No, thanks for asking. The process include these three tests, as you referenced, and we have one left to do. It is the last one you do which is the on-vehicle and this is when you have to coordinate with your vehicle partner, right. Because our JV does not make vehicle so we have to work with the vehicle partner. And we have to have the compliance agency there. It has been a difficult logistical challenge, which is why it's not done yet. And we expect that to be done shortly. And I don't know how long the paperwork process takes, but hopefully that too can be expedited so we can start delivering the product.

Got it. And then maybe the last quick one, I think I said the prior one was the last one, I apologize. But, here you are, with just under $50 million in cash, uncertain outlook, I assume not a big CapEx burden for this year. But how do we think about decremental margins for every say 10% drop in volume? Is there a meaningful impact that we should consider just given the uncertainty over the next quarter or so in terms of cash burn and other facets, I think a few of the prior analysts were asking about as well?

Yes, without going into too much detail, I mean, obviously, the second quarter will be some pressure there. Like I said, I'm not going to give any guidance in terms of how much margin pressure we could actually see but, I mean, you can calculate those from the statements there. But, like I said before, now we're trying to see kind of how we can actually weather the storm with regards to making sure that the liquidity is in the organization and that we're able to continue growing and investing in HPDI. In terms of a CapEx program this year, like you mentioned, it's not a big spend we're looking to augment a little bit of injector capacity there, specifically for Weichai and our European launch partner. So, as of right now, we're in good shape.

Got it. Thank you, very helpful.

Thank you, Jeff.

Thank you. This concludes the question and answer session. Thank you to everyone for joining us today. If you have any follow-up questions, please feel free to reach out to the Westport Fuel Systems Investor Relations team. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.