Westport Fuel Systems Inc

Thank you for standing by. This is the conference operator. Welcome to the Westport Fuel Systems first quarter 2023 financial 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' first quarter 2023 conference call, which is being held to coincide with the press release containing Westport's financial results distributed yesterday. On today's call, speaking on behalf of Westport, it's Chief Executive Officer David Johnson 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're 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.

Thank you, Ashley, and good morning, everyone. I'm pleased to be with you today to discuss our first quarter results. Today, in addition to reviewing our Q1 results, we'll be providing updates on our growing light-duty LPG business and, of course, our heavy-duty business where our patented HBDI products and technology are poised to play an important role in affordably decarbonizing heavy-duty, long-haul trucking. Also, we'll share some observations and highlights from last week's ACT Expo in Anaheim, California, and from the Vienna Motor Symposium, which was held the week before last. Amid a macro environment that continues to be turbulent, we delivered year-over-year revenue growth of 7% to $82.2 million, primarily driven by increased sales volumes in many of our business lines, including delayed OEM, fuel storage, hydrogen, and electronics, as well as increased sales volumes in our independent aftermarket segment. In the first quarter, we also delivered gross margin improvement in both our OEM and IAM segments, driven by pricing and higher sales volumes and an improving sales mix in our OEM segment. Westport Fuel Systems is a leader in the light-duty LPG space, and demand for our clean, low-cost LPG solutions continues to grow in Europe and other markets. supported by the increasing price advantage for consumers who can run on LPG instead of petrol and can therefore save money every time they refuel at their local fuel station. The LPG price advantage is driving growth in key markets like Italy, Turkey, the Netherlands, and also in North America. As the cost of new cars continues to escalate, consumers are looking for affordable alternatives, vehicles that are low-cost to acquire and low-cost to operate. That's an LPG advantage. Advantageous LPG pricing in major markets plays a key role in the decision to switch existing cars from petrol to LPG, and we have the products to enable this switch. Also, customers buying new cars are seeking affordable LPG-equipped models. OEMs are taking notice of growing consumer demand, which is expected to persist globally for decades. OEMs are acting now to commit to the future of LPG, providing a significant runway for growth for Westport Fuel Systems. As we recently announced, will begin production and supply of Euro 6 LPG systems through the leading European OEM in Q4 of this year. This new business materially adds to our revenue and market share. Our LPG market share in Europe is currently about 35%, and with this newly announced OEM business, we expect to increase to above 50%. As a reminder, the Euro 6 LPG system production and sales that begins in the fourth quarter of this year will run for two years, generating approximately €38 million over the contract period. The follow-on Euro 7 business we secured will double this scope, generating approximately 40 million Euro per year. We continue to experience growth in our delayed OEM business and expect this growth to continue. As a reminder, our delayed OEM business is when we or our customers apply one of our LPG fuel systems to a new vehicle in advance of selling and delivering that vehicle to end-use customers. More OEMs are taking advantage of our vehicle conversion capabilities. Volumes grew significantly this quarter compared to Q1 of last year due to strong demand from DR Motors, an Italian OEM that provides LPG-fueled vehicles to the Italian and other markets in Southern Europe. Moving to our heavy-duty business, in the first quarter, we recorded a positive pricing adjustment for our HPI fuel systems sold to our European launch partner. Our existing contract with our European launch partner concludes in early 2024. As moves through the rest of 2023, pricing is being negotiated. In the first quarter, HPDI volume declined by 13% compared to a year-ago quarter, primarily driven by unfavorable fuel price differential between LNG and diesel, which existed through all of 2022, causing fleets to reduce and or delay their purchases of LNG-fueled vehicles. As we discussed last quarter, production volumes lag vehicle sales volumes, and vehicle sales volumes lag fuel price changes. Now that LNG fuel prices have reestablished their advantage compared to diesel, We expect an improving vehicle sales outlook later this year and production and sales of HBI systems to follow that trend, again, with some timing lag. Looking ahead, Westport Fuel Systems offers the solutions needed by heavy duty OEMs to meet future emissions reduction requirements while delivering the performance, efficiency, and affordability that their fleet customers demand. As LNG pricing reestablishes a persistent advantage versus diesel, and as emissions regulations and associated penalties for OEMs loom, there is growing realization that affordable low carbon solutions like HPDI are required to meet OEM CO2 emissions requirements and fleet decarbonization goals. HPDI is already reducing real world emissions with thousands of vehicles on the road today. We're confident we'll continue to grow HPDI volumes through this decade and beyond. Earlier this year, our HPDI launch partner, announced new trucks that deliver more horsepower, increased efficiency, less emissions, and an extended driving range using bio-LNG. As is typical with new product introductions, we expect this model change will result in lower volume near-term and higher volumes later this year. In China, we continue to support Weichai as they work with their customers, the Chinese truck OEMs, to bring HPDI-equipped vehicles to their market. This includes demonstrations and field trials. We remain optimistic about the launch of production and sales, especially now that LNG prices in China have declined. China is the largest natural gas-tracting market in the world by far and measured in terms of volume and market share and has stringent emissions targets that are supportive of both LNG and biomethane. LNG prices have been normalizing in China, with prices just recently at a 21-month low, a significant drop from the elevated levels we saw last year. We're encouraged by the ongoing work we're supporting and the improving market conditions. Similar to the rest of the world, we're also building significant interest in China for our hydrogen HPDI offering as an affordable path to using zero carbon hydrogen in long haul heavy duty applications. Bottom line, our HPDI opportunity in China is significant using LNG and biomethane today and hydrogen in the future. Our business is on the right path. Clean, affordable transportation is in demand today and we see that demand increasing into the future. High energy prices and challenging economic times tend to be tailwinds for our business. Transportation is not a discretionary purchase, especially for commercial vehicles, and we make clean transportation products that are low cost for OEMs to develop and industrialize and low cost for end customers to acquire and operate. Last week at the ACT Expo in Anaheim, California, we showcased two fully functioning heavy-duty vehicles with our HPDI fuel systems for internal combustion engines. One truck fueled by low-carbon methane, either fossil or biomethane, and the other truck fueled by zero-carbon hydrogen. We helped ACT Expo attendees understand how HPDI with natural gas and renewable natural gas enables all the performance, efficiency, and durability of the diesel engines they're used to, with very little change to engines or vehicles, and yet all the low carbon and affordability benefits to enable a scalable solution. And with hydrogen and HPDI, performance and efficiency improves quite significantly, enabling an IC engine technology path for decades to come. Given the growth we've seen and our recent expansion announcement in China, we also displayed at ACT Expo our 350 and 700 bar hydrogen components that support both fuel cell and internal combustion engine applications. This follows fuel cell expos we joined in Germany and Japan already this year. We continue to generate significant interest from key constituents throughout our ecosystem, including OEMs, fleets, fuel providers, and more. Importantly and increasingly, hydrogen is considered the zero carbon fuel the industry needs. We're continuing to help the industry to understand that internal combustion engines with HPDI will play a critical role in transforming away from fossil fuels to clean and renewable fuels because HPDI is the most effective and affordable path. Two papers highlighting hydrogen HPDI were presented at the Vienna Motor Symposium, an industry event where the latest technological developments and product proof points are reviewed with our peers, engine and vehicle OEMs and Tier 1 suppliers. What makes this exciting for the Westport team is that these papers were each written based on engine dynamometer testing completed on two different engine platforms. Our work with Scania is well known, and the paper we presented with Scania outlines our success in demonstrating brake thermal efficiency of 51.5%, while achieving a 97% reduction in tailpipe CO2 emissions. The second paper, published by TNO, is based on research conducted using another European OEM engine platform, and was focused on outlining the differences in power density, efficiency, and emissions between spark ignited combustion and HPDI-enabled combustion of hydrogen fuel. TNO's testing and analysis demonstrated that hydrogen HPDI clearly outperforms spark-emitted hydrogen combustion with respect to power and efficiency, and doing so with HPDI requires minimal changes to today's diesel engines. This aligns well with our own results and with the superior performance achieved today in the marketplace using HPDI with methane as compared to spark-emitted combustion of methane. The results are clear. Injecting hydrogen using HPDI on an internal combustion engine produces a highly efficient yet practical green solution for long-haul heavy-duty trucking. Overall, it was highlighted in Vienna that for heavy-duty trucking and other high-load, high-duration applications, the required combination of power density, fuel efficiency, and durability can be challenging for technologies other than HPDI. For a certain segment of the transportation sector, near-zero carbon internal combustion engines continue to be evaluated as a key cost-effective solution, and our HPDI fuel system is well-suited to applications requiring high torque and high fuel efficiency. This, not surprisingly, has led to interest in HPDI and evaluation of HPDI by multiple OEMs. Affordable performance will drive adoption. The results announced at Vienna confirm that hydrogen HPDI offers lower CO2 abatement costs, along with the high performance demanded by customers. Our hydrogen HPDI demonstration trucks continue to provide high-profile and valuable evidence of the feasibility of HPDI fuel system-equipped engines fueled with hydrogen to deliver high-performance, cost-effective decarbonization of heavy-duty vehicle applications. With that, I'll turn it over to Bill to walk through our financials.