Thank you for standing by. This is the conference operator. Welcome to the Westport Fuel Systems’ First Quarter 2020 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. [Operator Instructions]. I would now like to turn the conference over to Shawn Severson with alphaDIRECT Advisors, Westport’s Investor Relations representative. Please go ahead, Mr. Severson.

Thank you, and good morning, everyone. Welcome to Westport Fuel Systems first quarter conference call, which is being held to coincide with the press release containing Westport Fuel Systems financial results that was distributed yesterday. On today’s call, speaking on behalf of Westport Fuel Systems is Chief Executive Officer, David Johnson; and Chief Financial Officer, Richard Orazietti. Attendance on 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 as 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’ll now turn the call over to David. David?

Good morning. Thank you for joining our conference call to review Westport Fuel Systems Q1 2020 results. I sincerely hope that all of you, your colleagues, friends, and family are healthy and well and that you stay healthy and well. I’ve had a chance to speak with many of you since our 2019 year-end results call on March 17. It has certainly been a challenging time, but I’ve also been incredibly impressed with the resiliency and ingenuity of our team in the face of this global crisis. Our focus has now shifted from COVID-19 response to a safe and efficient post-COVID recovery. As this pandemic made its way around the world, our teams have been following government guidelines and local protocols in each jurisdiction where we operate. Our people have shown tremendous fortitude and have safely and effectively resumed operations at all our locations. Despite the near-term uncertainty and expected softer demand on the passenger vehicle side of our business, I’m confident that the need for affordable clean transportation solutions remain. It’s encouraging to see that climate change hasn’t fallen to the back burner, rather, we’re seeing signs that the green recovery is on. Cost consciousness and renewed pragmatism mean that CapEx decisions will be heavily scrutinized. And with that scrutiny, will come to realization that electric propulsion for long-haul heavy-duty trucking applications is at best an expensive, distant hope for the far-off future. Gaseous fuel solutions are proven, available and affordable right now. While vehicle purchase decisions might be delayed by the post-COVID economy, we believe the compelling fundamentals point directly to solutions from Westport Fuel Systems. And with renewable natural gas, otherwise known as biomethane, the story only becomes more compelling. Post-COVID, the challenges of climate change and urban air quality have not disappeared. The need to efficiently…

Thank you, David. As David described in the financial highlights at the beginning of the call, during the first quarter, our revenues were $67.2 million, which was a year-over-year decrease of $6 million, or 8% compared to the first quarter 2019. The decrease was driven mainly by lower sales in March in our light-duty and heavy-duty business caused by the shutdowns from COVID-19. We had softer sales in our light-duty OEM business to our Russian and German customers and we had some contracted price concessions to our HPDI launch partner that started in late fourth quarter of 2019. Gross margin of $4.3 million decreased by $12.9 million year-over-year, primarily due to the $10 million charge we took on the field service campaign. On a tax-effective basis, the charge was approximately $7.5 million. As David described, we expect to recover 70% of the replacement cost from insurance recovery. However, we have not recorded the recovery at this time due to the early stage of the insurance claim review. We expect to recognize the insurance recovery once we have official confirmation from the insurance company. Excluding the charge, margins were also impacted by lower revenues from our OEM businesses by $3.6 million, partially offset by some improvement in our independent aftermarket business of about $1 million. Income from equity investments of $5.4 million was down 37% year-over-year due to lower CWI earnings, driven by a 17% decrease in engine sales and lower part sales. The decrease in engine sales in the first quarter of 2020 largely reflects the timing of transit orders and build schedules combined with lower refuse market sales. Net loss of negative $15.3 million, down $12.3 million year-over-year, resulted mainly from a $7.5 million charge for the field service campaign, lower OEM margin and an unrealized foreign exchange loss…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Eric Stine with Craig-Hallum Capital Group. Please go ahead.

Hi, David. Hi, Richard.

Good morning, Eric.

Good morning. Hey, great to hear your confidence in the balance sheet, given the steps taken to date and some things you’re targeting near-term. I was wondering you’re two months into the quarter, about a month beyond where you’ve started to ramp back up in Italy. I mean, I know that a lot of uncertainty and still the environment is, I mean, just a lot of question marks. But any – anything, any details you can share about what you’re seeing early days in Italy, markets where you may be seeing some relative strengths, that would be very helpful?

Yes. Eric, glad to answer. Glad to follow-up. It has been and continues to be a difficult time, as everyone knows, not just us. But we do see green shoots, as you mentioned just a moment ago, that there are people coming right back to life, consumers and industries also. And so, as you know, going into the COVID crisis, we created a number of scenarios, surely like many companies did and stress tested our liquidity plans against those scenarios. And as we look at that to, not kind of looking backward, a little bit on what’s actually unfolding, we see that we bounded the equation enough. So our worst case is that we use – is worse than it’s actually right now, which maybe sounds not so optimistic, but frankly, we’re pleased to see the market coming back. And we think that the actions being taken by governments have been very helpful. But we’re not through this yet and so that’s where we come out saying, so far so good. We’re pleased that our factories are opened. We’re pleased that our customers are reopening. We’re pleased to get the orders from our OEM customers and see that order bank building back up. But there is a lot of time still ahead of us and it looks like a long road.

Right, right, okay. I can appreciate that. Maybe then, just on China and Weichai, I mean, your commentary here in the call is certainly different and more optimistic than in the release itself, saying targeting something in 2020. I’m curious, I mean, what types of actions have you taken in the market? And I know that it doesn’t change the – what you think that the growth curve looks like. But I mean, how does this setup that if we were to see a – that the certification was granted. I mean do you think this is a quarter or two, or how do you think about when you may start to see activity and then that activity followed by a ramp in volumes?

Yes. I totally get where you’re coming from on the question and we’re making our efforts to understand as best we can, what looks ahead for us in the Chinese market. We’re confident in getting that certification. We’ve done all the things we need to do. The product is ready to launch. We need the certification, of course. We did that paperwork, and we expect that will come. I don’t know at what pace. So we’re hopeful, it’s any day now, but we are in a wait-and-see mode. In terms of the market dynamics though, I’m really encouraged about the opportunity that we have a great power partner with Weichai Power. We are the strongest player in the market with natural gas engines already today with spark-ignited product. Adding HPDI to the mix, it’s a far superior product to the spark-ignited product and we think the market is really ready for it. Having said that, we also recognize, like we went through in Europe with our lead customer there, there is a learning cycle for every fleet operator, every truck driver to try it out and get used to the new technology and get comfortable with it. We do think that the evidence, if you will, of the market uptake in Europe will propel the Chinese market even more. We also think that Weichai Power is a supplier of engines. In our joint venture, Weichai Westport is a supplier of engines that can serve multiple OEMs and will serve multiple OEMs, and so we have that additional benefit. Nonetheless, my expectations for this year are modest and my expectations for 2021 are quite significant. I’m looking forward to the launch curve that unfolds in front of us.

Got it. Maybe last one for me. Just if you could provide some details on the faulty – the pressure device. And I guess, where I’m coming from is that, that likely have some bearing on the insurance repayment, I mean, you clearly feel confident about that, but also in the timing of getting that reimbursement, I think, you’re targeting in 4Q?

Yes, absolutely. So this is – you never like to have these situations. But in our business, we have to react. I’m very pleased with the way our team has reacted. We identified the root cause. We fixed the root cause. We got new parts into production and we’re working with all our customers around the world to replace those suspect parts that are in the field as quickly as we can. In terms of the insurance recoveries, it seems pretty clear to us that we’re in a good place and we’ll have a good result. But necessarily, we have to work with our insurer to secure those recoveries and to provide all the evidence and work through that process and that just takes time. So I’ve had in my career, unfortunately, a chance to work on a number of actions like this with different OEMs and it always takes longer than you’d like with respect to getting the job done and getting the insurance recoveries. But at the same time, this is just, let’s say, normal part of business unfortunately that we have to go through from time to time. So we see our way clear to the insurance recoveries and to providing good products for our customers.

And that view that it always takes longer than you’d like, you’re factoring that in when you talk about 4Q as the target?

Absolutely. So, we have the discussion opened up with our insurer, but we haven’t been able to conclude it at this point in time. It’s pretty early in the process. We’ve just started the process in the field. So there is plenty of work to be done. But I don’t think this is a multi-year process by anyway, shape, or form. So I think, within this year is very reasonable.

Okay. Thank you.

Thank you, Eric. Good to hear you.

Our next question comes from Rob Brown with Lake Street Partners. Please go ahead.

Hi, good morning.

Good morning.

Just wanted to clarify the – kind of on the automotive side, the OEM versus the aftermarket recovery expectations. Have you seen order flow start to return from the OEM side? And I guess, which one do you sort of see ramping more quickly and sort of your view on the –how the – how those two markets recover?

Yes. I think it’s pretty clear from what we’ve seen already and just thinking about the marketplace that the trucking industry in general around the world has a demand that it doesn’t fluctuate nearly as much as what consumers do. So, on the trucking side, we need to move freight. And one of the things I was contemplating recently is that typically, in an economic downturn like we’re certainly having now and we’ll have for sometime, truck fleets do push off orders and don’t buy as many trucks as they were originally planning to conserve some of their capital in kind of tough time. But my expectation is that, when they push up those orders, they are pushing orders off of diesel trucks and they’re keeping or maybe increasing their order of LNG trucks. With Germany putting in place or then extending the tax exemption for natural gas trucks in Germany, there are big economic incentives and we already know that our trucks provide a lower total cost of operations even absent those road toll incentives and purchase incentives, just based on the fuel price. So from my perspective, while the market for trucking may decline overall, have some softness that will have some inter – short period of time, hopefully. The demand for our products, I think, could actually and we expect to grow and we’re seeing signs of that. On the passenger vehicle side, this really gets to family budgets. Basically, people taking their cars to a local workshop and having it changed from gasoline-only to a biofuel with natural gas or propane. This is an individual decision of the consumer. And so the consumers need to see that the economy is coming back, they can go out to dinner again, their job is retained. These real individual aspects of budgets and so forth. At the same time, I think a countervailing force is there, is that basically, our products are purchased in markets around the world because of the money they can save on fuel. And so we think there is a balance there that will be achieved and we – we’ll have a good business going forward. But it’s really hard to judge it right now until we truly get into the – I’ll say, the normal range of recovery that is just starting to unfold right now in markets around the world.

Okay, good. Thanks for that clarity. And then on the CWI side, it was down in the quarter. But what’s your visibility there? how those demand trends stabilized here into the most recent months? Have you seen that come back, or is that still quite uncertain?

We see a little bit of softness. But I think, much like the comments I made regarding commercial vehicles in Europe, the same thing plays out in North America. As an example, UPS placed this large order last year talking about their view of natural gas trucking. And I – from what I understand in the marketplace, people aren’t backing away from that. They recognize they’ve done years of work to decide what kind of technologies they want to apply in the marketplace. The waste managements in the world and other key customers of ours continue to be keen to have our product in their portfolio and in operation for their fleets. I do think there is some softness, if you will, in transit buses. As I’ve mentioned previously, has nothing to do with COVID, where basically, electric buses have made some inroads and so that puts pressure on our transit side of the business. Nonetheless, I think, as people try out those technologies, natural gas and transit will continue to be an important part of the mix. And so we see some softness just based on the general economy and some delays and so forth, but not so significant in the grand scheme of things we believe.

Okay, great. Thank you. I’ll turn it over.

Thanks, Rob.

Our next question comes from Colin Rusch with Oppenheimer & Company. Please go ahead.

Thanks so much, guys. Can we talk a little bit more about the details on this EDC facility. Can you talk about any sort of covenants you are anticipating, collateral, including restricted cash that will be associated with that line?

Hi, Colin, it’s Richard. Regarding security and collateral, it’s going to be the same one that I believe in place on the [Technical Difficulty] term loan. So nothing really changed on that. The – it was a very friendly – it’s a very friendly loan. It’s going to be prime plus 3%, so it comes at a time that’s very helpful to us and the EDC has been a big supporter of CleanTech and has been in our corner right from the beginning as can be seen by the deferral sort of the extension effectively of the terminal.

Okay.

We hope to get it announced shortly. We’re just going through the paperwork because of all the security. Our – just the way the nature of some of our loans that we’ve done in the past, there is – it’s a little bit tricky of where we’re attaching security in different jurisdictions, but that’s the only thing that’s really holding it up right now.

Okay. And so can you use that capital across the organization, or is it really going to be restricted to the Italian business?

The – it is mainly dedicated towards investing in HPDI and working capital in the parent. So it’s – that’s where the money is going to be spent. With regards to the rest of the business, we’re using debt financing through – mainly through Italian banks right now, which have been even more lucrative with their sub-2% cost of borrowing.

Okay, got it. And then, can you talk a little bit about the dynamics on inventory levels and sell-through for both the aftermarket kits and the DOEM business? And I think one of the concerns is really around having to work through the existing components and kits that are out there. And do you have a sense of how many months of inventory are in the channel at this point and kind of the order pattern that you’re seeing right now for incremental business?

Actually, let me talk first about DOEM. I think this is a very interesting kind of dynamic to understand. So our DOEM business, delayed OEM business, as you know, is basically retrofitting zero-kilometer brand new cars that come from OEMs, as they come from the factory before they go to the dealer and they’re really a great business for us. And what we see right now is that basically, the vehicles that were on ships and in-transit from our customers in Asia are still coming. So the pause, if you will, and the drop in the market for us and operations for delayed OEM is still in our future. So we’re running quite strongly. There was a backlog, because we shutdown for a little bit more than a month in Carasco. And as soon as we opened, there was all sorts of vehicles ready for us to retrofit. So that’s going plus or minus close to full-field for us on the delayed OEM side. On the kit side, where we’re shipping kits out to customers around the world. Basically, I would say, inventory levels weren’t particularly out of line. And so – but we had this pause of our operations of producing kits and we had pause of the workshop and distributors around the world. And I would say, these were largely coordinated. So we don’t see any specific buildup of inventory or drought of inventory. And so this is what we’ve been watching very closely because, of course, we’re not going to sell more until that are sold to us, but the dealers and distributors around the world and workshops around the world. And so that order flow is starting to come back and giving us some encouragement that the market is reopening and customer is getting back to, let’s say, normal behavior, that will let us have the material flow that is something that is good for our business and that we can manage and keep up with.

Great. And then on the supply chain side, you guys have been pretty proactive in terms of getting components, and are you seeing any issues or delays on incremental component supply as you start to ramp up again?

This is another area where I think, both through our efforts, as you mentioned, kind of when China shutdown first, we had supplies from China that we had to find alternatives and accelerate shipments and things like that. We did that. That worked well kind of leading into our own shutdown. And then a lot of our supply base for our, especially Italian operations, but also our Dutch operations are local and they’re in the area. And so they had the same kind of experience, if you will, with respect to shutdown. And so overall, we have not had significant supply chain disruptions. There’s always something to work on for our supply chain team, but nothing that we haven’t been able to mitigate that caused us any significant, let’s say, material consequence in our ability to work for our customers.

Okay. Thanks, guys.

Thanks, Colin.

Our next question comes from Sameer Joshi with H.C. Wainwright. Please go ahead.

Yes. Good morning. Thanks for taking my questions. Just a clarification on China. The – you mentioned that the testing was done, but the certification was impending. Was the – were the tests according to the results that they expected? And is the certification delayed because of any technical issues?

There are no remaining technical issues, Sameer. So, we passed all the tests. They confirmed we passed all the tests. It really is, as we understand from our side, within the bureaucracy of the Chinese Ministries to process the paperwork and get the certifications out. And I can’t begin to explain what that process looks like and how long it will take. Seems to all of us on the outside it should be quick, but here we stand waiting for their certification. I do expect it to come. I do expect it’s just bureaucracy, but it’s really hard to put a beat on. Okay, so how long, is it a week? Is it a month? What is it?

Right. Understood. Okay, thanks for that. As far as the field service campaign goes, are there – is this just the cost of replacing the units? Or is there any associated liabilities that you expect or may already have incurred?

Yes. It’s just the cost of the replacements basically. So it’s a fair bit of labor to make the replacement component in the field. We have to go to the vehicle and make the replacement. And so that’s the primary cost that we see. And frankly, and fortunately, we have no field incidences. So there is no liabilities in that regard and we’re looking to keep that track.

Okay, good to know. And then one just last clarification on the SG&A costs, which were lower by $5.8 million, of which $1.8 million related to the one-time costs, but then how are the $4 million of the remainder distributed between the lower compensation costs and a favorable legal claim settlement? I mean, just trying to understand, how much of these is going to be ongoing and what is one-time?

Could you repeat your question, again?

Oh, yes. The SG&A costs were lower by $5.8 million and around $4 million of those can be attributed to lower compensation costs and favorable settlement of the legal claim. So what was the legal claim amount?

The legal claim was – it was roughly about $400,000 and we had accrued more for that historically, because we managed to settle for a smaller amount. So that one goes away. And then what was the second one?

Yes. So I was trying to understand how much of this lower compensation costs will continue into second quarter and maybe third quarter?

The lower compensation costs will definitely probably continue to about August. So in terms of the wage subsidies that we get in Italy and Canada, those have been extended until the end of August 31, so almost there. So it really depends on the length of the pandemic, but right now it’s almost all of the third quarter.

Got it. Okay. Thanks. I’ll turn it over.

No problem.

Our next question comes from Jeffrey Osborne with Cowen and Company. Please go ahead.

Hey, good morning. Most of the questions were asked. But I’m trying to get a better understand – understanding of your dialog with Weichai. So clearly, you’re waiting for your certification. You seem frustrated that it’s not in. Are – is Weichai actively marketing the vehicle or the truck engine, et cetera, expecting an imminent receivable of the certification, or are all wheels not in motion until that is received?

Yes. So I would say – Hi, Jeff, good morning. I would say very clearly that Weichai, our joint venture and our joint venture partner, Weichai Power, are working with our customers, the vehicle OEMs to prepare the field, if you will, because obviously, when you prepare the HPDI engine that includes a number of components on the engine, but there are quite a few components on the vehicle. So as an example, the tests that were run that achieve – that lead to the certification include vehicle tests that we’ve been doing with our customers. So I would say that ground is pretty well established and ready. It’s just a question of, no one can order until you have a certification and so we need that certification. So we can take the orders from our customers and place – and the joint venture can place those orders with us for the components.

Got it. And then a couple of people asked about different end markets for you in order strength or lack thereof. Is there a way in sort of playing the game of asking each one separately? Is there a way you could say of all the end markets you sell to, which one has recovered the quickest or has the best visibility for you and which one is the worst?

What I would tell you is that, let me start with the kind of struggling part, the struggling part is in India. I’m really bullish about that market in general, but they’ve had a very long shutdown and I think it’s really challenging to reopen that business and to get back on our feet there. But on the other end of the spectrum, on the strength of our business, I’m really encouraged by what’s happening in Europe with respect to support by the governments and also order flow from our customers with respect to, specifically HPDI. So in the end, we won’t get the growth that we were hoping for in this year just because of COVID, but I see significant strength and I’m continuously compelled by the business opportunity. And frankly the need, I think you might have caught it in my opening remarks that my view is – as – in tough times OEMs, like the ones I’ve worked for before and like the ones that are our customers today have to dial back on their CapEx investment just like we are. And when they do that, they’re going to look for more pragmatic and practical solutions and I think that’s – so I think it bodes well for us and we’re seeing that already as the fleets place their orders with our lead customer in Europe and as those orders come on to us.

Got it. Thank you. That’s all I had.

Thanks, Jeff.

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

Yes. I think I’ll take that. This is David Johnson. So I want to thank everyone for joining the call and really appreciate your time and questions. As we look at our business, we recognize clearly this is a tough time and we’re – we’ve been very focused on making sure we could protect our employees and our team members, their health and safety has been paramount. We think overall, that has worked well and we’re happy to be back at work. And we’re looking forward to the economic recovery as it unfolds and we’re poised with the liquidity we have to get through this period and continue to deliver for our customers and help get the world to a lower carbon transportation that’s truly economic, affordable and available now. So thanks, everyone, for your time. Have a good day.

This concludes today’s conference call. You may disconnect your lines. Thank you for participation, and have a pleasant day.