Westport Fuel Systems Inc

Good morning. My name is Lara and I will be your conference operator today. At this time, I would like to welcome everyone to the Westport Fuel Systems Q2 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. Ms. Ashley Newell, you may begin your conference. Good morning, everyone.

Welcome to Westport Fuel Systems' second quarter conference call for the 2023 fiscal year. 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 David Johnson and 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 call and our responses to certain 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 day, everyone. I'm pleased to be with you to review our 2023 second quarter results. Today, Bill and I will walk you through an overview of those Q2 results, also an update regarding our growing LPG business, and finally, I'll speak about our planned HPDI joint venture that we and Volvo announced in July, as this marks an important inflection point for Westport's HPDI business. On a consolidated basis, Westport delivered record revenue of $85 million up 6% compared to last year. In addition, we continue to deliver improving gross margins, both in dollar terms and as a percent of revenue. This quarter's top line record result was primarily driven by increased sales volumes in our delayed OEM, electronics, and fuel storage businesses, and additional revenues in our independent aftermarket business due to increased sales volumes in Africa, Eastern Europe, and South America. These are partially offset by lower sales to our light-duty OEM customers in India and lower sales volumes in our hydrogen and heavy-duty OEM businesses. Regarding sales volumes in our heavy-duty business, earlier this year, our European HPDI launch partner, Volvo, announced that they would launch new bio-LNG-fueled trucks with more horsepower, increased efficiency, lower emissions, and an extended driving range. As is typical with new product introductions, we expected this model change to result in lower sales volumes leading up to the launch and higher volumes following the launch. We saw exactly that in the second quarter, and we're looking forward to the volume ramp starting later this month and continuing into and beyond Q4 of this year. We've said for some time that we're a leader in the LPG space and that demand for our clean, low-cost LPG solutions continues to grow. Our announcement yesterday morning fully confirms our leadership claim. As a direct result of our excellent products and technical services, we've added to our previously announced Euro 7 supply agreement, and as a result, we will become the exclusive supplier of Euro 7 LPG fuel systems to our customer, a leading global OEM. As we announced about a year ago, we'll begin delivering Euro 6 LPG systems to this customer in the fourth quarter of this year, and we'll continue to supply them as Euro 7 comes into effect. These supply agreements for Euro 6 and Euro 7 LPG systems add materially to our revenue and America's share and leverages our existing engineering and production capabilities. As a reminder, the Euro 6 deliveries begin in Q4 of this year and will generate revenues of 38 million Euro over the following two years. The newly announced supply of Euro 7 LPG systems is forecast to generate revenue of 63 million Euro through 2028. This increases the total revenue generated from LPG fuel system supply agreements for Euro 6 and Euro 7 with this OEM to approximately €255 million. We look forward to the opportunity to continue supplying our new customers for the longer term, that is, beyond 2028 and in markets around the world. The ability of our alternative fuel systems to provide customers an affordable way to use cleaner, low-cost fuels is also driving growth in our delayed OEM business. More OEMs are taking notice of our fuel system products and vehicle conversion abilities. We grew delayed OEM sales volumes again this quarter as compared to Q2 of last year due to increasing supply of LPG systems to DR Motors. DR Motors has been growing strongly during the last few years by offering low-cost LPG-fueled vehicles in the Italian market. Recently, they've accelerated their growth by adding sales in Spain and Eastern Europe. As demand for LPG-fueled vehicles increased across Europe, DR Motors has been gaining market share. We're pleased to be the key supplier of LPG fuel systems to DR Motors. We expect the LPG market to continue growing as the LPG price advantage is substantial in many of our key markets. As an example, in Europe, we've seen an LPG price advantage that equates to, in U.S. dollar terms, more than $6 per gallon for customers who fuel with LPG compared to those who fuel with gasoline. This kind of LPG price advantage is playing a key role in consumers' decision-making, and Westport has the products to respond to this growing customer demand. OEMs are also taking notice of this increasing demand, which we'll expect will persist in a variety of markets globally for decades to come. Although our heavy-duty business experienced an expected volume slowdown this quarter, we see a very bright future for HPDI. HPDI is the most affordable and practical product for reducing carbon emissions in long-haul and heavy-duty applications. LNG pricing in Europe has returned to an advantageous position relative to diesel fuel. And this price advantage is a key driver of fleet demand, enabling fleets to run on cleaner fuel with reduced operating costs. That is lower TCO, the key metric for fleets. And our planned HPDI joint venture, we expect to accelerate the commercialization of HPDI globally. Following five plus years of field experience with HPDI, Volvo has given Westport's HPDI a big vote of confidence. The planned joint venture with Volvo is expected to elevate HPDI's market relevance and enhance our competitive position, expand our reach to a wider customer base, drive growth and innovation by pooling resources and knowledge, and strengthen Westport's financial position. When the definitive agreements are finalized, Volvo will purchase 45% interest in the JV directly from Westport for $28 million. Following the closing plan for early next year, as the JV meets certain milestones, Volvo will pay Westport an additional earn out of up to $45 million. With a lot of work ahead of us, both teams will be working diligently to meet our target launch date in the first half of 2024. In the near term, I do want to highlight that we're pleased with the agreed pricing structure that will drive improved HPDI profitability this year for Westport and the future for our JV. Volvo has outlined their strategy to focus on three different technologies, battery electric, fuel cell electric, and internal combustion engines with biofuels. Our HPDI joint venture will secure the long-term future of the internal combustion engine with biogas now and hydrogen in the future. We recognize that our HPDI fuel system offers the most affordable and practical solution to respond to both environmental demands and fleet performance requirements. HPDI enables the internal combustion engine to perform like or better than the diesel engine that the industry has counted on for decades. Today, Almost all trucks on the road depend on the internal combustion engine, and almost all, which means way too many of those engines run on high-carbon diesel fuel. Using HPDI allows diesel engines to use cleaner fuels, delivering environmental benefits with economics we can all afford. Both Volvo and Westport are committed to attracting new customers globally to adopt HPDI, primarily in long-haul and off-road applications. Since the announcement last month, our conversations with global OEMs have been very positive. including with OEMs in Europe, China, Japan, and North America. Through this partnership, Volvo is demonstrating their commitment to the future of HPDI, and we're inviting other OEMs to join them. In addition to the conversations we've had, work on the HPDI development programs currently underway is progressing well. This includes our work with Scania, as well as two other OEMs who are testing and evaluating hydrogen HPDI on their engine platforms with both hydrogen and methane fuels. Focusing quickly on the near term, as I've previously mentioned in this call, HPDI volumes saw an expected decrease in the second quarter, which was mainly attributed to the Volvo's model change. We do see orders picking up. As a reminder, factories in Europe are closed for about four weeks in the July-August period. Therefore, we don't anticipate seeing the full impact of this ramp-up in volumes until the fourth quarter. Looking ahead, we remain confident that Westport is offering solutions required by heavy-duty OEMs in order to meet future emissions reductions requirements. while delivering the efficiency and performance being demanded by their fleet customers. As LNG pricing re-establishes a persistent advantage versus diesel, and as the 2025 emissions regulations and associated penalties for OEMs loom, the growing realization is that affordable, low-carbon solutions like HPDI are required to meet emissions targets. HPDI is reducing emissions today with thousands of trucks already on the road. We're confident that we can continue to grow these volumes. With that, I'll hand off to Bill to walk you through our financial results.