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

Thank you and good afternoon, everyone. Welcome to Westport Fuel Systems' third 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 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 such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from these predicted in the forward-looking statements, so you are cautioned not to place any 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'll now turn the call over to David. David?

So, thanks Shawn. Good afternoon everyone. Thanks again for joining the Westport Fuel Systems Q3 conference call. Before I discuss our business, let me take a moment to introduce and welcome Westport Fuel Systems' CFO, Richard Orazietti. Richard joined our team in September and he and I immediately hit the road to meet with investors in San Francisco, New York, and Boston. It was the perfect way to get started. Richard joins us at a pivotal time, pivotal for the company, pivotal for the industry, and now also pivotal for Richard. He has had a distinguished career with extensive experience in corporate finance, risk management, operational management, and strategic planning to name just a few. I know you all join me in welcoming Richard to Westport Fuel Systems. First to headline financial results, I'm pleased and proud of what we achieved in Q3. The continued growth of HPDI sales combined with our strength and independent aftermarket and like to the OEM businesses resulted in transportation revenue of $75.4 million, up 15% from a year ago. Q3 net income from continuing operations improved by $17 million to a gain of $4.9 million compared to a loss of $12.1 million from the same quarter last year. We recorded our third consecutive quarter of positive EBITDA and our sixth consecutive quarter of positive adjusted EBITDA. We created $3.5 million positive cash flow from operations before changes in working capital compared with the use of cash of $11.6 million in Q3 2018. These results are evidence of growing global demand for our clean transportation systems. Our customers are deploying our products and technologies to deliver clean, cost-effective, transportation in markets around the world. They're helping to save money and to save the environment all while keeping us moving. Let me turn now to the…

Thank you, David. This is my first quarterly financial results call since starting with Westport Fuel Systems in early September. I'm excited to be joining Westport Fuel Systems at this point in time in the alternative fuels industry and also having the opportunity to drive the company's business transformation into a growing sustainable company. I've been impressed by the talented and passionate professionals at Westport Fuel Systems and the embodiment of the vision creating a better world through innovative energy solutions. I've also had the chance to speak with many of our shareholders and analysts that cover the company and I look forward to meeting with more of you in the near future. Turning to the financials, we had a strong third quarter on many fronts. From the continued strengthening of our operating performance in our three lines of business that David highlighted to you before. We posted our first quarter of net income from continuing operations of $4.9 million, our third consecutive quarter of positive EBITDA of $11.7 million and six quarters of positive adjusted EBITDA. To review our third quarter results in more detail, I'll begin on slide two. We closed the quarter with sales of $75.4 million, net income from continuing operations of $4.9 million, and positive adjusted EBITDA of $9.4 million. Our third quarter adjusted EBITDA was an improvement over our second quarter 2019 and our third quarter 2018. The improvement over the prior period is a result of strong sales during the quarter and reduced operating costs. Turning to slide three, we look at our transportation business segment. Transportation revenue was up 15% compared to the same quarter in 2018, primarily due to the strength in HPDI and delayed OEM sales. The aftermarket business revenues were consistent with the prior year, quarter and euro terms,…

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] Our first question is from Colin Rusch with Oppenheimer. Please go ahead.

Good afternoon, everyone. This is Kristen [ph] on for Colin. I was just wondering if we could start with the OEM and the DOEM business. And can you provide some additional color on the strength that you mentioned in those businesses and maybe break out the two and where you're seeing that sequential growth in that light-duty business?

Yes, nice to hear your voice, Kristen. Glad to come back and discussion of OEM and DOEM. We don't have a civic breakout for you, but I can give you a little color. Basically our DOEM this is I would say is the stronger growth story within that, and really that reflects the flexibility that we have with respective DOEM. We can take a product from a manufacturer and create a DOEM kit and get the DOEM business started very, very quickly, so in a matter of six to nine months, if you will. And so on that basis, we can be very responsive to what's happening in the marketplace. And so that's really driving our business. I did mention and you might recall from the last quarterly call how we had a real strong showing with respect to tank valve production and deliveries in Q2 and that I indicated that was a very good sign for what was coming with vehicles in the market in the future. And I noted that the just today, there was a release of registrations in Italy that showed books had extremely good performance in the Italian market with respect to natural gas vehicles. More than half of their golf models were sold with natural gas fuel systems, including our components. And so that gives you an idea of the strengths and the potential of not only the DOEM but the OEM market when the products are available and in markets where the fuel is available. And so we really see tremendous growth potential on a go-forward basis for those products.

That's great. Thank you. And then the next question that I wanted to ask is, is just on the R&D side, are you seeing any particular areas of investment where you feel like you need to be making that commitment right now?

As a general principle, we're very happy that we have a complete set of products in the marketplace that respond to the demands for clean transportation products, meeting emissions requirements, meeting customer demands, and so forth. Nonetheless, the market doesn't stand still and we continue to invest in developing next generation products. We feel that, that pull from our customers with light-duty side and heavy-duty side, and we're responding to it. But I would tell you as a general principle, we don't see the need for massive investments to hit some new standards and something like that. And so it's more a keeping our products competitive in the marketplace and being ready for that next round of emission standards and things.

Great. And if I can sneak in just one more. Can you provide an update on the discussions with CWI and the sunset of that JV for the end of next year?

Yes, I'd love to do that and I look forward to doing so. At this juncture, I don't have any news or update to share with you. Our situation is as it was in Q2 in terms of we have a contract, we're proceeding to do business, and we're having discussions around what comes next and in that phase. At this juncture, unfortunately, I have nothing I can share.

Great. I appreciate the questions. We'll take the rest -- get back in the queue.

The next question is from Eric Stine with Craig-Hallum. Please go ahead.

Hi David. Hi, Richard.

Hey, Eric. How are you?

Great. You?

Excellent. Thanks.

Good. On the on the OEM, I appreciate the details there, the nearly $12 million increase year-over-year. I'm just wondering your commentary about HPDI being the primary driver? I mean any way to dial that in a little further, are you saying that it was greater than 50%? Or maybe some type of percentage would be great. And then also I'm just curious, obviously, you're seeing good traction, steady traction there with Volvo. Is that something that where you saw sequential improvement in volumes?

Yes, thanks for the question. And let me just provide what I can in that regard. And basically, as you know our businesses with our European lead customer and we had a small start with our Chinese customer. And so the vast majority of our revenues in the HPDI business today are still driven by one customer and so we're not breaking it down. I apologize for that. But yes, in terms of sequential growth, we continue to see that. So, we continue to work with our customer and we have plans for product enhancements and all sorts of good things in the future, but it's driven by the demand in the marketplace. And we do see those volumes continue to move forward.

Okay. It was worth the try. Yeah, absolutely. Maybe just turn into the pipeline, I know -- and I can appreciate you can't necessarily talk about specifics -- specific OEMs teams and programs. But though in the last quarter, you did add a development agreement to that pipeline. And so with that in mind, I mean, as the CO2 standards come on, as we go through this year where they're setting the baseline. I mean how do you anticipate that pipeline? The speed in that pipeline, how fast those programs move forward or decisions are made whether to move forward or not?

Yes, a couple a couple comments on that. It's our normal business to do development programs at OEMs around the world for both light-duty and heavy-duty products. And what I can tell you about that is the decisions aren't so predictable and the programs are very lumpy. And so what I mean by that is one day we're not working with a given OEM and the next day we are and then it's a fair bit of work. So, it's a challenge for us to manage. And in this timeframe, right, as we look out into the beginning of the 2020 to 2030 timeframe, and the regulations that are coming on, both in light-duty and medium-duty and the need to reduce Co2, and then the affordability and availability of our products. My expectation is that those development revenues will grow. It will be -- more exciting future than they are today. And I look forward to making the announcements about such things, but today, I don't have one further for you.

Yes, got it. Maybe last one for me just turning to aftermarket. It looks like that was down a little bit versus the prior year. Just curious I know a lot of moving parts here in what 90 different countries, but just maybe some of the main markets and the puts and takes to that?

Yes, we saw really good -- so as you mentioned, we have a number of key markets where we're very strong, its important part of our business. We mentioned some of those earlier in the call, Italy, for example, is a really important market for us and hence we have our operations there and and a long presence there. And the growth is good. The pull on the product is strong there; meanwhile, in places like Poland, we also see growth in Russia too. So, those markets are really important to us and even in Argentina, despite all the turmoil there, we see good results. So, I know there's a desire for further breakout of results from country-to-country. But we have we have that in our future perhaps and look forward to doing that.

Okay, thanks a lot.

Our pleasure.

The next question is from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good afternoon.

Good afternoon Rob.

On the European market, given the new regulations earlier this year, how have you seen the truck makers responding? I guess the ones that that aren't your direct partners, but are they in the -- how would you characterize where they're at? Are they in the decision-making stage yet? Or are they really in the evaluation stage and maybe some color on how the market's been changing over this year?

Sure. In general what we see is our lead customers, I would say in a very strong position, they know they are with respect to leading the marketplace and having our HPDI system available for their customers today. And the other OEMs in the marketplace that we work with all the time, I can't be specific, of course, but they're all weighing their options and considering what their portfolio will consider in the future and making their decisions. And so on our work with each one of them, unfortunately, for the most part is going to remain a supplier secret until such time as our customers decide they're going to make an announcement, we will be making those announcements. But I do see as a general premise that right now because of that regulation and increasingly at the clock ticks away, the intensity of the discussions and the work we're doing is growing and so that's exciting for us.

Okay, good. Thank you. And then the Weichai program, did you say that was it was entering final kind of testing and just wanted to clarify what you said about the timeline there? Do you have a sense on when that happens and how it might affect the launch time?

Yes, glad to talk about Weichai. Our work with Weichai continues very strongly and where we are in that project is basically in the final stages to get certification completed and certified, if you will, by the agency in China, China DPA. And I expect that soon, but frankly, it's not a timing we control and that's our challenge. As the team there's all the work we do and we have to overcome all our challenges and deliver the product and we've done that. Now, it's the certification step, which unfortunately isn't so controllable. And so we do see some risks that we want to achieve exactly the curve and a time that we were hoping for and planning on. But it's not out of our grasp yet, so we're still working on it.

Okay. Thank you. I'll turn it over.

Thanks, Rob.

[Operator Instructions] The next question is from Chris Souther with Cowen and Company. Please go ahead.

Hey, thanks for taking my question. For Weichai, you discussed the certification process being out of your hands, I just want to see is there anything that is in your hands at this point with that launch or anything that's left for you guys to do specifically?

Yes, that's a great question. I would say basically other than continuing to support our customer and work with them as they face any challenges, there's no specific things. So, in our business, we take our components, design them, and validate them, and then de-path [ph] them and deliver to them to the customer and we're in that condition where all our commodities are available for our customer and we're just waiting for the final steps that they have to do and certification and sales, production, all those following steps.

Got it. And then a few people have other kind of tried to touch on this, but with the initial launch partner, can you talk about any regional commentary in the past you've kind of mentioned specific markets where there were kind of initial launches. Anything you can kind of give up to that factor? It's not just you discussed the kind of the ramp-up in stations, is it fairly similar kind of markets we should be looking at to kind of follow where you might be seen strength there?

Yes, the infrastructure build out I would tell you is probably one of the most important indicators of where you'll see truck sales growth next. And there's really good data on the web about where they are today, where they're going to be in the future. And so I think that is more than anything else kind of a key ingredient on where the regional growth is and where the trucks are going to have the greater market share sooner. It's really hard to summarize in a call and go through all that data, so I won't even try. But as a general principle, I also struggle with the -- they're not our sales and vehicles and so we don't have the detailed data ourselves. So, what we're going off with that as we see it is announcements of infrastructure, announcements of fleets that they looked at we're so proud, we bought these trucks and they're working great for us.

Excellent. And then just my last one, is that $3.2 million service revenue that you call out from development work with an OEM, is that relate to HPDI and go through the OEM kind of a segment that you discuss or is that something different?

Yes, that's one of our heavy-duty programs. And yes, so -- that's it.

Okay. So that's included in -- when you say the majority of that OEM increase is related HPDI, it's in there?

Exactly.

Perfect. I'll hop in the queue. Thanks, guys.

Thank you.

This concludes the time allocated for questions. I'll now turn the conference back over to Shawn Severson for closing remarks.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and have a pleasant day.