Thank you for standing by. This is the conference operator. Welcome to the Westport Fuel Systems Third Quarter 2018 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Caroline Sawamoto, Senior Manager of Investor Relations and Communications for Westport Fuel Systems. Please go ahead.

Thank you, and good afternoon. Welcome to Westport Fuel Systems third quarter 2018 conference call, which is being held to coincide with the press release containing Westport Fuel Systems financial results that went out this afternoon. On today's call, speaking on behalf of Westport Fuel Systems is Chief Executive Officer, Nancy Gougarty; and Chief Financial Officer, Mike Willis. 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 U.S. and applicable Canadian securities law, and such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements, so you are cautioned not to place 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 will now turn the call over to Nancy.

Good afternoon, and thank you for joining us for Westport Fuel Systems third quarter results conference call. In the past several years, we have been very active to taking the necessary steps to move Westport Fuel Systems into a profitable sustainable organization. Our transformative efforts include optimizing our product portfolio, aligning our cost with revenue, positioning for future growth, delivering financial performance and utilizing our people and their talents. I am pleased with quarter three 2018, it was a solid quarter. Year over year revenue was up 16% plus quarter three is our second consecutive quarter of positive adjusted EBITDA. By achieving positive adjusted EBITDA for the second time this positions Westport Fuel Systems to adjust our secured interest thus reducing our borrowing costs as well as freeing up restricted cash. I will let Mike go into more detail on this in a minute. We continue to see rapid adoption in the transportation industries towards environmentally friendly fuel and technology. It is becoming apparent that this adoption trend is propelled by anti-diesel sentiment in concert with stringent emissions regulations around the world but especially in Europe. A few proof points I want to highlight. Firstly, the European Union new car registration is the first. In fact, the first half of 2018 in the EU, diesel vehicles registrations fell 16% compared to the same period last year, while alternative powered vehicles were up 36% with CNG showing a 90% increase year over year. Consumers are seeking environmentally friendly vehicles and freedom to enter into city centers. All of this is driving a greater urgency for market ready solutions. Secondly, the European Commission proposal on CO2 emission targets for heavy duty trucks is moving forward. European Commission's proposal has a 20% CO2 reduction by 2025. Moving to 35% in 2030, with 2019…

Thank you, Nancy. Having now completed my first full quarter with Westport Fuel Systems I'm pleased that we recorded our second consecutive quarter of positive adjusted EBITDA. Repeating this achievement is a good sign for the company and has important implications which I'll touch upon shortly. I'll start with Slide 5, that provides a summary of our third quarter results. Note that the current and comparative periods have been adjusted to exclude the compressor business for which we completed the sale in July and received $14.7 million in gross proceeds. We closed the quarter with sales and $65.5 million and net loss of $12.1 million and positive adjusted EBITDA of $4.3 million. For the nine months we reported sales of $209.8 million, an increase of 22% over the comparable period in 2017. As a result of our stronger revenues the first nine months of the year we are revising our revenue guidance to $260 million to $275 million for 2018 up from a range of $235 million to $255 million provided earlier this year. Operating expenses decreased as a result of lower R&D expenses but remain high due to elevated legal expenses related to the ongoing SEC investigation and unrealized foreign exchange losses. As already noted we achieved positive adjusted EBITDA for the second consecutive quarter. This an important milestone as it triggers the release of a security position against certain of our assets held by one of our customers. The security can now be pledged to Export Development Canada one of our senior creditors which will result in a reduction of the interest rate on this loan from 9% to 6% as well as the waiving of certain fees. This should translate into meaningful annual tax savings for the company. In addition this loan is currently secured by a…

Thank you. [Operator Instructions] Our first question comes from Colin Rusch of Oppenheimer.

Thanks so much. Guys can you talk a little bit about the indications you're seeing from the European luxury OEMs on what's happening in that market as we go into 2019? Surely you're getting some sense of how many models are going to be going forward in '19 and would expected volumes might be?

Hey Colin, this is Nancy. Just to give you some sense of that, we think that certainly the European market relative to OEM offerings, Volkswagen, certainly leading the pack relative to CNG vehicles. We do see some other LNG vehicles also in the mix. We think that calendar year '19 will be quite good. There are a couple OEMs in the European market that in the last couple quarters have withdrawn their engine from the market as they are retooling it, and we expect them to re-enter sometime in the latter part of '19 or early '20. So we think that next year will be calendar, '19 will be good. And we see that the offerings are quite broad across the Volkswagen family. And also when I think one of the important things maybe it is not only the fact that there'll be offerings but the OEMs are now depending on the results from the, I'll say natural gas products to add to their calculations relative to their hold emissions which we also think is quite positive in terms of how they're depending on this technology to meet their standards.

Great, that's super helpful. And then just adjacent, well not necessarily adjacent market but what we haven't talked about much is high horsepower applications, are you seeing any interest or potential in those markets right now for the new designs or as a potential growth area for the company?

I would say that this is the dialogue has bubbled up a little bit more than what we have seen in the past six months. Again, I think it's mostly our guess is it's mostly based on what we're seeing in terms of crude prices. And also we are seeing some other interests that are coming through some you know where there are being certain programs that are trying to get sponsored and that kind of thing for some off road applications. But I would say not the kind of dialogue that we're having relative to the transportation sector Colin.

Perfect thanks so much guys.

Our next question comes from Eric Stein of Craig-Hallum.

Hi, Nancy, hi Mike.

Good afternoon Eric.

Hi, so just wanted to go back to the CO2 proposal in Europe and I think it's pretty important that 2019 is the baseline so any diesel enhancements or engine enhancements don't matter. Just curious have you seen a noticeable uptick in conversations. The depth of those conversations the urgency on the OEM side and then just wanted to confirm I don't believe spark ignited can get close to those proposed levels.

Okay, let me let me try to take the front part of it. I may need some technical guys on the back end and I don't know that I have the right people, if I don’t we’ll get you those spark ignited question here shortly. But on the front end of the question is the dialogue is very robust right now with a variety of folks in the market. I think this is the from our point of view what we found interesting relative to this whole healthy EU activity that's going on is that when they did this the upfront discussion it was actually a lower number and instead of coming out of the comment period and going lower which is what we anticipated the number went up. So it went from 15 up to 20 which is quite interesting at least from where we sit. I would say that the dialogue that differs a bit from what we've heard in the past is people are trying to understand how they can get quicker to market versus perhaps trying to find that unique opportunity for them for their vehicle or to distinguish them from others. So I would say quicker solutions and that's where we're nicely positioned relative to the readiness relative to our products. I know from the spark ignited technical point of view I would say from a CO2 perspective on heavy duty trucking we knew HTDI is quite in the right zone on that. I’ll have to get back to you relative to doing a score up against it in terms of spark ignited.

Okay fair enough, that’ll be great. So just sticking with HPDI I'd love to just get a little color on the geographic breakdown of the pipeline you're seeing. I mean obviously heavy in Europe. Everything going on in China with Weichai but just curious if you're starting to see that in other geographies around the world.

I would say in countries that have high LNG you know activities going such you know and now I'll say you know even countries I'll put Russia in general in the Europe. But Russia is one of the areas by which you know there is some discussion about what kind of products one would want for that market. Again you have lot of terrain challenges and lot of infrastructure relative to LNG in those markets. But I would still tell you that most of our discussion is very much Eurocentric as well as China.

Got it. Okay, maybe last one for Mike. Just, on the guidance range, with one quarter to go, actually six weeks to go pretty wide range. So I mean, I know FX is one of the factors that puts and takes just would love to hear some of the other things that get you from the low end to the high end?

Sure. So you mentioned foreign exchange will be one of those. So for Q3 over Q2, we had a $1.8 million impact to the negative, so that's always one that we keep our eyes on. The second one is seasonality. So while Q4 should have the same level of seasonality, that Q3 does, there is some shutdown time over Christmas, it's probably half the amount of time in Q3 but does impact Q4 more so than a couple of the earlier quarters of the year. The other one that we're seeing, we're starting to see some impact and it's hard to quantify at this juncture is some geographic softness, let's say with a couple of markets that are reasonably important to us being Turkey and Russia. So Turkey because of devaluation of the lira. And then Russia, gas prices have increased recently going into the winter season. And that's been impacting volumes a little bit. So I would say those are the key factors that we're thinking about as relates to how sales will come in, in Q4.

Okay. Thanks everyone.

Thanks Eric.

Thanks Eric.

Our next question comes from Amit Dayal of H.C. Wainwright.

Thank you, good afternoon, guys. In relation to your efforts with Weichai, should we expect some development revenues ahead of any shipments taking place?

So we are still taking a view in terms of whether we can recognize that as revenue, I would say that cash has been coming in, which is probably more important to me then revenue, but we're still taking a view from an accounting standpoint in terms of how GAAP suggest that we should treat that those payments.

Got it. Thank you for that. And then with all this favorable sort of regulatory developments happening in Europe, could you talk a little bit about what is happening from an infrastructure point of view? Who is making those investments? Is it more sort of the private public sector? Is it more government entities to support the shift towards alternative especially LNG et cetera?

I would say it's a combination, and I think different countries taking different term, I'll say different players are coming into the market. I would say Spain and Italy, we see a lot of private stations where when we get into Germany and the Netherlands, we see a lot more folks like Shell and those folks putting in the station. I think it's going to be a combination of both, especially I don't know, if you saw that in Germany, starting in January 1, 2019, they're going to, if you have an LNG truck, that's tanks on LNG that you'll be able to be exempt from toll. When you have those kinds of things that will drive infrastructure both public and private, as well as big players and small players. So we think that some of those kinds of activities now that there is clarity relative to how people are going to benefit from it, will drive the infrastructure but we definitely see the large players upping the game but we also do see private infrastructure as well and small stations coming in that are geographically serving certain people.

Understood and just maybe this maybe a little early but you know given your updated guidance and we're at around 11-12% growth for 2018 with Weichai in play with favorable regulations coming potentially in Europe do you think you know similar or better growth rates are achievable in 2019.

That's a good question. It is probably a little early because we are going through our 2019 budget cycle right now. I would say each market is going to have its own dynamics between the aftermarket the OEM the light medium duty OEM and then HPDI and heavy duty side. I think probably the strongest visibility we'd have in terms of growth is obviously on the heavy duty side just given the base on which we just launched the product last year. I think we're still taking a view as it relates to some of the other markets or some of the other segments.

Got it, thank you. That's all I have.

Thank you.

Our next question comes from Rob Brown of Lake Street Capital Markets. Q – Rob Brown: . :

Yeah I would say it's you know because as you know we have been working for years with HPDI and with the Westport joint venture in China. So we have a lot of good activity already going. So, some of the steps that we already have we'll be working with their system integrator because we need to get the software tied together in order for the engine and the tanking system and the fueling system to come together. In terms of the componentry for the most part most of the components as you know are reapplications and just minor modifications in order to fit into the Weichai powertrain system. And then obviously the Vehicle Integration side that will go with launch partners in terms of depending on what different truck manufacturers decide to bed the Weichai engine into it. So with that we think that there's a couple of those folks that are identified already. And but as you know Weichai does sell their engines throughout the China market to many of the domestic truck manufacturers. So I think each of those will take on their own steps Rob, in terms of how they're doing. But we will be working on the engine side on the electronics and the integration in order for a system to work as well as on the chassis and vehicle construct. So all of the activity for a couple folks are already underway. The power train as you can imagine is well developed and that's something that we've had a lot of opportunity to work on over the years. And I think now creating and working through the specifics with all these different interface points is coming along quite nicely.

Okay, great. That's a good overview. And then on the European truck with your launch partner you talked positively about Hanover and you've got a light duty activity picking up I guess. What are you seeing in terms of the cadence demand on that launch partner and I guess interest as well? Thank you.

I don't -- we don’t have a lot as you know that we can really reported detail. I would say that the piece that I continue to be most pleased upon as we're seeing further country growth in terms of where the vehicles are being sold. So and we're also seeing relative to like recent presentations that the launch partners giving at different conferences and that kind of thing that there are, they're talking about, that they think the truck is going quite nicely. The countries that they talked about [indiscernible] pass this over to me is in the UK, the Netherlands and Norway there's some specific folks that are working very heavily on that. And, we've got lots of things going on in a variety of other countries, including Spain, and Sweden and even in Germany, and especially, as I mentioned earlier. As we have further understanding of exemptions, and I'll say relative to incentives such as in Italy where they have are now offering €20,000 for LNG truck and the launch partners truck qualifies for that. We're seeing that those are the countries also that are creating quite good demand and interest.

Okay, thank you, I'll turn it over.

[Operator Instructions] Our next question comes from Jeff Osborne of Cowen and Company.

Excellent. Good afternoon. A couple questions on my end, I was hoping you could provide a little bit more detail on the light duty vehicle side. Is there any noticeable trends on either geographies that are doing well or poorly any trends on delayed OEM or OEM trends?

In terms of geography, I mentioned just a moment ago, Russia and Turkey are turning a little soft on us. I would say from a positive I think…

It's a light duty, right?

Yes the old fuel systems business as well as piece of the Westport business, certainly there's exposure to Italy to know what's going on Eastern Europe to get some stuff in South America any commentary about those?

South America has been continued to be very strong and then I think Italy is doing well as well. So, from, in terms of other geographies anything's are generally positive.

And like I said, but Volkswagen with them offering a lot more vehicle lineups in terms of the brands and they have their position. So I think that, we're the discussion in the show rooms or picking up and I think that, again, there's a great opportunity, I think that there's continued opportunity in the aftermarket in the vehicle conversion side of the business as well. So from our side, from the passenger car perspective, we're quite pleased with the kinds of dynamics that we're seeing in the market at the moment.

It's good to hear. And as we look out to next year do you have any design wins, or can you just touch on your launch cadence. Do you have any OEMs whether it's Volkswagen and, has a new Jetta or fill in the blank OEM that's kicking in, in '19 that wasn't present in '18?

There are a couple, I'm not sure where we are relative to being able to talk about them publicly, at this point in time, but there are activities that we have going with several OEMs relative to, providing OEM solutions for their vehicles. I’ll pass it back to Caroline for her to get with you off line specific to that the ones that we can talk through.

Yeah I would maybe just say that the pipeline of activity that we're involved with in terms of putting bids in is pretty strong. The question is whether they will hit in 2019 or in 2020 is probably the best way to characterize it Jeff.

Because there are some things that are on the vehicle side, and there's some things on the powertrain side so in some cases where there's a power train that can be put across a vehicle it's quite fast to do it. But if you need a new power train put in place that takes the homologation of that across the vehicles that is a bit longer.

Got it, and then just on that staying on light duty vehicles, was there any issues with WLTP implementation this quarter or last quarter that were noticeable. I know it's a smaller piece of your business and not many people own the stock. But I was just curious.

I don't have any comments on that front.

Okay, maybe just shifting gears to CWI then. Can you just touch on you know any sense of what the mix was of near zero. You've highlighted that engine upgrade as a driver, I didn't know that the bulk of the volume today or piece of the volume any sense on the mix?

In all the engines are near zero certified. So you know some of it depends on you know how they're running relative to -- to the renewable natural gas. We -- I could just reflect what I heard partly on you know what Clean Energy made in their announcement it sounds like things are quite robust in terms of that. I would say we're very pleased on several fronts from CWI. First of all the portfolio is there. We are getting the build slots we need in the last quarter of the year in order for us to continue to be able to bed the engines into the chassis. So you know from our point of view we do see that this whole near-zero portfolio really is a game changer for us and is really providing good uplift for us in terms of all of calendar '18 and we think that's going to carry on beyond calendar year '18 for sure.

That’s good to hear. The last question I had about CWI. Is there a rule of thumb or any trend as to the mix between domestic and international shipments for that, I know there's been.

I would say we still remain very heavily domestic, though there are some as you know there are some opportunities and I know that we get the help of Cummins, their international group selling and we have gotten some uptake relative to some international packages. And so but North America the U.S. is the primary market.

Got it, thank you. Appreciate it.

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

Thank you everyone for joining us today. And thanks again for your interest in Westport Fuel Systems.