Westport Fuel Systems Inc

Thank you for standing by. This is the conference operator. Welcome to the Westport Fuel Systems second quarter 2022 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Ashley Newell, Senior Director of Investor Relations. Please go ahead.

Good morning, everyone. Welcome to Westport Fuel Systems' second quarter 2022 conference call, which is being held to coincide with the press release containing Westport Fuel Systems' financial results that were distributed yesterday. On today's call, speaking on behalf of Westport Fuel Systems is Chief Executive Officer David Johnson and Chief Financial Officer Richard Orzetti. 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 in this conference call and our responses to various questions may constitute forward-looking statements within the meaning of the U.S. and applicable Canadian securities laws, and as such, forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. With that, I'll turn the call over to you, David.

Thanks, Ashley. Good morning, everyone. I'm pleased to be with you today to discuss our second quarter. Once again, our team delivered strong top-line results as we continued to execute against our strategy amid a very challenging macro environment. Today, I'll be walking you through our HPDI growth story, including the regulatory environment and total cost of ownership analysis. which demonstrates that HPDI is the most affordable way and the most available way to reduce CO2 and meet CO2 standards. I'll also discuss our LPG business for both our light-duty OEM and independent aftermarket channels, where we're seeing improvements because of the increased price advantage of LPG compared to petrol. Finally, I'll walk you through our Indian business, where we're seeing growth today and expecting this growth to continue as CNG fuel station buildup continues towards 10,000 stations. Following that, I'll pass it over to Richard to cover the financials. Our business continues to deliver strong results quarter over quarter despite the ongoing challenges our industry is facing. In the second quarter, we delivered revenues slightly up compared to Q2 last year, an achievement considering the combined impact of adverse forward exchange rates and sanctions stemming from the Russia-Ukraine conflict, which combined can negatively impact the quarter by $13 million. Excluding these impacts, revenue would have increased by 16%. This is truly a testament to the strong results given by our business units where we saw increasing sales. That is in India, as well as in our hydrogen and electronics businesses, plus the addition of the fuel storage business we acquired in late May 2021. Although not a second quarter item, I want to take a moment to highlight the significant new business we announced last month to supply LPG fuel systems to a leading OEM. This deal is forecast to generate €38 million in revenue through the end of 2025, with production expected to begin in Q4 next year. Cost-competitive alternative fuel solutions such as LPG are a compelling option to reduce greenhouse gas emissions in markets like Europe, where refueling infrastructure is well-established. We're also developing fuel systems to respond to future regulations, including the proposed Euro 7 standards. And we look forward to updating the market on these developments. This new business highlights our industry position as a leading tier one supplier of alternative fuel systems that respond to current and future emission standards and the customer's needs for affordable transportation. This new business we secured is a key step in our plan to grow to profitability. In May at the AST Expo in Long Beach, California, we unveiled our hydrogen HPDI fuel system for internal combustion engines for head duty applications. and we did so in the form of a fully functioning heavy-duty demonstration vehicle. There was dramatic interest from all the different players in our ecosystems, OEMs, fleets, fuel providers, and more. Increasingly, hydrogen is viewed as the zero-carbon fuel we need for our industry, and we're helping the industry to understand that IC engines with HPDI will play a critical role in transforming from fossil fuels to clean, renewable fuels. because HPDI is such an effective and affordable path to follow. Fundamentally, the outlook remains positive for our business as we continue to deliver solid results despite the various headwinds we and our industry are facing. In our heavy-duty OEM segment, despite a challenging LNG pricing environment, our European HPDI launch partner is continuing to gain market share over competitors that offer spark-ignited natural gas engines. We're seeing the market appreciating and valuing HPDI's superior performance and efficiency, and as a result, we continue to see order flow for HPDI systems despite headwinds from higher LNG fuel prices relative to diesel. HPDI volumes will be a significant driver to bring Westport to profitability as increased volumes drive economies of scale. And we're in a good position now for HPDI growth. The 2025 European CO2 regulations will drive OEMs to act to decarbonize. European OEMs need to meet regulations that require a 15% reduction in fleet average CO2 with products that don't adversely impact the performance and reliability of their customers' demand. HPDI is the solution. A key reason HPDI is gaining in the marketplace comes down to superior fuel efficiency. In a recently published road test, HPDI enabled fuel savings of more than 25% when compared to other natural gas engines. 25% is a massive number in this industry. In the lifetime of a typical truck, about $700,000 worth of fuel is consumed. So a 25% savings means $175,000 in lifetime savings. A very positive business case and why HPEI is continuing to prove its economic and environmental benefits every day on the road in thousands of vehicles in Europe. HPDI, especially when using biogas, will be an important part of the solution, made even more compelling when the fuel price advantage of LNG versus diesel is re-established. Looking to the wider policy climate, we continue to see a positive trend that supports our heavy-duty business outlook. The Ukraine crisis has spurred a commitment to reducing reliance on Russian gas, resulting in additional biogas production plans in the EU, which is a huge positive for our sector. We're already seeing examples of this. In June, Scandinavian Biogas announced a $269 million bio-LNG delivery agreement. And in Italy, Biomet announced receiving a $75 million investment to create Europe's largest plant for producing biomethane from waste. While it's unlikely that any single low-carbon energy source can replace Russian gas, especially as the EU seeks to reduce reliance on fossil fuels and imported energy, the wider adoption of biogas and more investments into net zero fuels creates further growth opportunities and new markets for our clean, affordable products. To summarize, our heavy-duty business remains strong in the face of industry-wide headwinds. There is growing recognition and appeal of our HBI systems because of its low cost, clear performance advantages over spark-emitted engines, and carbon reductions that fleet operators are looking for and which OEMs require to respond to regulations. Hydrogen HPDI is going to play a pivotal role in the future of Westport, and we've demonstrated this through both analysis and engine testing, and now with our demonstration vehicles, that HPDI works great with hydrogen. Unsurprisingly, we saw considerable interest in our hydrogen HPDI solutions at the ACT Expo in May, and our work with Scania continues this summer with their newest 13-liter state-of-the-art engine in our test facility in Vancouver. Hydrogen HPDI is compelling with near zero greenhouse gas emissions, lower vehicle costs, and low industrialization costs as compared to fuel cells or battery electric vehicles, particularly for heavy-duty long-haul trucking applications. We've demonstrated that power, torque, and efficiency using hydrogen HPDI is significantly better than the same engine running a diesel fuel. These demonstrations are changing the conversation right now. To be clear, OEMs can now see that HBDI has a long and bright future because it's successful on natural gas and biogas today and is the most economic way to use hydrogen in the future. Driving our conversations with both current and future OEM customers regarding our hydrogen HBDI solution is the potential to bring the product to market sooner due to the straightforward application of existing HBDI componentry. The opportunity to continue using OEM's existing engine development capabilities and manufacturing capabilities Avoiding large investments required to develop and industrialize other technologies is very appealing. It makes good economic sense, good business sense, and is a real solution for the industry. Combining better economics with better performance is driving significant interest in our unique product offering. Hydrogen continues to gain significant traction and attention globally. The European Union has set a 2050 deadline to achieve its goal of becoming carbon neutral. and hydrogen fuel in the heavy-duty vehicle sector will play a substantial role in their decarbonization strategy. Following our success at the ACT Expo, we'll introduce hydrogen HPDI technology for the first time in Europe at the IAA Transportation Conference in Hannover, Germany in mid-September. And we're thrilled to continue to demonstrate to the global industry that our HPDI technology works brilliantly with zero-carbon hydrogen and enables the most affordable way to use green hydrogen in long haul heavy duty transportation applications and other important high load applications. We're enabling HPDIs used by OEMs and fleets for long haul trucking with natural gas, biogas, and with a clear path to zero carbon hydrogen. HPDI is a solution of the future that OEMs can access today. Just last week on August 4th, we hit another milestone. the Westport Hydrogen HPDI truck pulling Rayleigh's Ozark trailer fueled with hydrogen for the first time in America at the West Sacramento Station, the first hydrogen station in the world. Turning our attention to China, in light of LNG pricing that continues to negatively impact the market in China, Weichai has continued to work with HPDI so they'll be poised to launch its market fundamentals return. Discussions continue with potential Chinese partners specifically around hydrogen HPDI. China now ranks first in the world for the number of hydrogen refueling stations with more than 250, accounting for about 40% of the global total. The China Hydrogen Alliance forecast that demand for hydrogen will reach 35 million tons by 2030 with continued robust growth for decades to come. Light-duty vehicles fueled by LPG are a growing market trend that positively impacts our business through both our aftermarket and OEM channels. High fuel costs create opportunities for our business as both industry operators and end customers look for lower cost options. Lower costs to acquire and lower costs to operate. Alternative fuels are part of the answer. What's happening currently with the price of LPG is a good example. For LPG, there's a clear price advantage that is a growing part of our story. Fuel prices change, then customers react. It's in these price advantage environments where we gain market share and ultimately drive profitability. In important markets like Turkey, Italy, and Poland, LPG is available, and the price advantage over petrol has recently been increasing. In Italy, for example, historically the price advantage of LPG was about $0.60, rising to over $0.80 more recently, comparing petrol price per liter with LPG price per petrol liter equivalents. Drivers who drive an LPG are saving roughly 50 euro every time they refuel their car. I'll say that again. Drivers who drive an LPG are saving roughly 50 euro every time they refuel their car. In addition to the pricing advantage, LPG refueling infrastructure in Europe is widespread, supporting further growth in the market itself. Our business in India continues to grow and has become a case study for the type of market where we can be competitive, and as a result, gain market share with our clean, affordable solutions. Our revenues in India continue to grow, up more than 50% to $10 million this quarter. The market in India is transforming from a diesel petrol market to CNG, where we continue to see a price advantage. Natural gas-fueled vehicles are taking the place of diesel in a real way and now represent more than 11% of sales for passenger cars. and about 29% of commercial vehicles. And we're seeing strong demand for our products from three-wheelers and taxis, as well as heavy-duty trucks. India aims to have natural gas make up 19% of their overall energy mix in the coming years, alongside plans to build 10,000 natural gas refueling stations, which are expected to be installed by 2028. India is poised to play a significant role in the growing hydrogen economy as well. In June, Adani New Industries one of India's largest energy companies, announced a $50 billion investment to develop green hydrogen ecosystem, representing India's largest commitment to green hydrogen from an individual company to date. In summary, industry represents a growth market for us supported by a strong fuel price advantage, a supportive policy backdrop, and a growing hydrogen economy. No question, we continue to face headwinds now, but we also have substantial tailwinds. Emissions regulations, government action, societal demand, economic, and great products that respond to the call to action right now. We remain well-positioned as a company. We have the right products for today and for the future. China, the world's top LNG buyer last year, is in the midst of one of the largest build-outs the industry has ever witnessed. Ten new LNG import terminals are slated to come online in 2023 alone, and capacity will roughly double in the five years through 2025. In Europe, we're just two and a half years out from the 2025 regulation with penalties being implemented. And I can tell you from discussions we're having with global OEMs around HPDI that life alms are going off as the cost significance and overall capability and reliability concerns of the newer technologies are being laid bare. The European Union has relaunched RepowerEU in the face of its energy challenges. RepowerEU's plans call for rapidly increased imports of LNG, replacing imported pipeline gas in Russia, the utilization of the significant untapped biomethane resources in Europe, and also green hydrogen production, all of which will require significant prioritization and build-out of infrastructure. There's also been a quadrupling of the hydrogen targets originally set out in the Fit for 55 legislation. The ambition was 5 million tons, and now with Repower EU plan, they target 20 million tons by 2030. This represents a significant growth opportunity for our company. All of this indicates increased interest in hydrogen HPDI as a game changer for heavy duty transport. With that, I'd like to turn it over to Richard to go through our financials.