This is the conference operator. Welcome to the Westport Fuel Systems Second Quarter 2020 Conference Call. [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.

Thank you, and good morning, everyone. Welcome to Westport Fuel Systems Second 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. The 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 expectation 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?

Thank you, Shawn. Good morning everyone. I sincerely hope that all of you and your loved ones are healthy and well and that you're finding some time to enjoy the summer. Since we updated you with our Q1 results in early May, there been strong signals for a green recovery in multiple jurisdictions around the world and associated stimulus spending to build a better, more resilient and low carbon economy. I believe in a green recovery presents a once-in-a lifetime opportunity to transform our transportation system so that we can sustainably move people and freight. And I'm confident that we have an important role to play. At Westport Fuel Systems, we've developed, validated and build solutions that are in production and for sale in 70 countries and are being used around the world to enable net zero carbon transportation. Following our COVID shutdown, our teams have safely and effectively resumed operations at all of our global locations. While revenue was significantly impacted in Q2 due to these shutdowns and those of our customers around the world, I'm pleased to report our net income was positive, an improvement versus the same period last year. Our team has shown resilience and has been steadfast in their efforts to remain nimble in response to this difficult time. I'm particularly proud of the significant efforts we've made and the results we've achieved to improve liquidity since the start of the year. And I'm equally proud of the incredible efforts made by our team members to take care of each other during COVID, safely return to work and to respond to our customers throughout the shutdown and recovery period. The COVID-19 global pandemic continues to have far-reaching ripple effects. The surge in coronavirus cases in the U.S. and elsewhere has analysts closely watching recovery-related indicators.…

Thank you, David. As David described in the financial highlights at the beginning of the call, during the second quarter, our revenue was $36 million, which was a year-over-year decrease of $46.4 million. The decrease was mainly driven by COVID-19-related factory closures and reduced customer demand. As we discussed in our first quarter results call, our facilities in Italy were closed in April and reopened in early May. We were also impacted by the temporary closure of our HPDI and launch partners' facilities in April. As most of our businesses have now reopened, we are seeing improvements in demand and are expecting moderate recovery through the remainder of the year. Perhaps most encouraging is that we are seeing stronger HPDI orders than previously expected. Consolidated gross margin for the quarter decreased by $7.1 million or 37%, to $12.2 million compared to $19.3 million for the comparative period in 2019. Gross margin decreased due to lower overall sales during the quarter and contractual HPDI price reduction. Offsetting the sales decline was a $7.7 million insurance recovery recorded in the current quarter which related to the $10 million charge we took in the first quarter for our field service campaign for the replacement of Pressure Relief Devices. Consolidated operating expenses for the quarter ended, decreased by $14.7 million to $10.5 million or 58%. Operating expenses were lower due to government wage subsidies, compensation reductions and reduced spending in the current quarter. In addition, we had an unrealized foreign exchange gain of $3.6 million due to appreciation of the Canadian dollar. Net income of $3 million increased by $5.3 million compared to the second quarter in 2019, as a result of a $7.7 million insurance recovery that I spoke of, while lower operating expenses due to government wage subsidies, salary reduction and the…

Thank you, Richard. To recap, we remain focused on a few key priorities for the second half of the year; the successful launch of HPDI in China, continued cost reduction, new light-duty and heavy-duty OEM businesses in key market categories, profitable growth of our light-duty business for both aftermarket and OEM channels. Despite the near-term uncertainty, a stronger regulatory ecosystem is still there and so is the strong desire for a green recovery. I'm confident in our team and we're committed to delivering. Westport Fuel Systems is market-ready, tested in gaseous fueled vehicles to achieve scale in many market segments. With the potential of renewable gas to offer a net zero carbon solution, we're ready to be part of the economic recovery. With that, I'd like to turn it back to the operator to take your questions

[Operator Instructions]. Our first question comes from Eric Stine of Craig-Hallum.

So I appreciate all the color. I was just wondering, maybe by end market, take it a little further, would love to just hear some discussion about trends you're seeing by segment early here in third quarter.

So just to get started today, thanks for your question, Eric. Generally we're seeing the recovery that we're hoping for. Of course, steeper would have been better, but month-over-month, we do see the markets coming back, and so that's encouraging. I think this speaks more than anything else to the fundamental need we have as a society for transportation, whether it's of people or freight, we need our vehicles and then we need them to be clean. And so I think overall, we're happy to see the market coming back, and that's looking good. We do see a stronger recovery on the commercial side, so on commercial trucking and with our HPDI product than we do on the consumer side. But we think that's just a timing thing more than anything else. People can defer their purchases, and I would say people were harmed by the COVID-crisis around the world in a significant way, and it takes some time for that to come back. But overall, the green recovery that we see and the actions that governments are taking are really supportive of our mission of clean transportation. And so on a long-term basis, we feel good. In the near-term, we're pushing very hard to see that recovery come back across all the segments.

Yes. Good. And maybe just digging in on HPDI a little bit. I know you've always had the issue where you're a step removed from the ultimate fleet customer. But I would love to just get your thoughts on the confidence there. I mean, you're clearly more confident there than in the other parts of their business. I mean, do you attribute that to that there's some pent-up demand and so you took a quarter or quarter and a half off because of COVID, and now things resume? Or is there something else to that dynamic?

Well, I would say it's really important in the commercial trucking industry around they world just to think about some of the fundaments. So fleet goes to buy trucks, fleets using trucks. And when you have what we have happening in Europe with, in a sense, it's like Germany has to basically exempt natural gas trucks and extend that to 2023, I mean, that is a huge economic impact. We have to understand that in the world of trucking, these are businesses that are working to move freight for their customers and make money doing it. And so when you have an advantage like a road toll tax exemption and then you look at the fundamental advantage that our technology offers in all markets around the world of saving money on fuel, which is such a substantial portion of the cost, if we go back 12 or 18 months, we're talking about the product's new and people are testing it out, they're trying to buy 1 or 2, and we're moving beyond that phase, which is really what we've anticipated and looking forward to, where basically fleets are saying, no, I've heard from the other place, I've seen and I heard about this road toll tax, and all these factors are coming together to drive demand. In previous calls, I've mentioned the fact that we were coming up on the conclusion of the baseline measurement period for the CO2 standard for commercial truck companies in Europe. And that deadline came and went at the end of Q2. And so the baseline is now established. And if you dig into any of those reports, you can see that long-haul trucking has an absolutely fundamental of weighting on the order of 70%, 80%, depending on what exactly you categorize as long haul. But it's really the factor in having OEMs be able to achieve their targets in 2025 and 2030. And so now, as I mentioned in my comments, the race is on to meet those targets. And so I think all those factors are coming together to be really supportive of our business and the growth of that business. So overall, we're pleased about that dynamic playing out in the market right now.

Yes. And then my last question, and you kind of read my mind there. But on the baseline now being set, so it sounds like part of that is your current partner, now is really incentivized to push on HPDI. But curious how that's starting to impact or continuing to impact conversations with new potential partners.

I think the most important thing here that I was worried about in the COVID period and has not come to fruition is that no one is backing down from the requirements in 2025 and 2030, with respect to CO2 emissions from commercial trucking or for passenger cars, for that matter. And so like it is on your mirror, objects are closer than they appear; it's coming, right? We have this deadline. As an industry, we have things penalties that are looming and we have this need in the world to clean up transportation, reduce CO2. And I think the markets and our customers and prospective customers are increasingly recognizing that we can help them meet those requirements. And certainly our lead customer is showing the way.

Our next question comes from Colin Rusch of Oppenheimer.

Can you provide us with any sort of visibility on when you expect orders to begin in China and how that cadence might be? Obviously, you're very close with your partner there. But want to get a sense of if you've seen any indications around timing on that at all. David Johnson: Yes. So thanks for the question, Colin. Good to hear you this morning. Fundamentally, we've received orders and filled orders. So as the -- filling the pipeline of product. So we know the actual commercial launch of engines and then vehicles is on the horizon, it's coming. But the acceleration of those orders is pending the actual certification release from the Chinese authorities. And so that is, as you know, it's been kind of a -- first there was COVID, then there was this, let's say bureaucratic challenge. And so we've had, I would say a significant delay in that regard that we don't appreciate and had to work through, and hopefully the last step we're working through will happen. But we've already received orders and will fill those orders to basically fill the pipeline so that we can start production, or so our customer can start production, their customers can start production. But yes, we're missing as piece, as you can appreciate.

Yes. Got it. Okay. And then just shifting gears to the hydrogen. I appreciate the commentary around that and the gas expertise. I guess, can you speak to the opportunity near term as folks go through the early stages of vehicle development, how engaged you are with those folks and what that opportunity might look like over the next couple of years? And then how you start to think about content per vehicle as we get into some real viable solutions in 2022, '23?

Absolutely. I think, for us, it kind of seems like just another, if you will, right, because we're in the gaseous fuels business, that's our specialization. And as I mentioned in my opening comments, there's a beauty and an elegance to the circular economy that hydrogen potentially has. But we're already a leader in that market, primarily in off-road applications materially [indiscernible] our customer Plug Power and supporting customers like Ballard. But as I think about how that unfolds, to the point of your question, we're working heavily with customers around the world that are pursuing this technology; China, Japan and North America and so forth. So we have a very good engagement with customers that are developing product and we're supporting them strongly. And yes, we're exciting about the opportunity. But I do have to be cautionary in my kind of outlook, because there's a lot of work to be done to go from prototypes to production to volume on all these on-road applications. I think you're aware that in North America, we have some fuel cell vehicles that are already in the marketplace, but it's a small world and only a few refueling stations. And in places like Europe, we have very little so far. So there's a fair runway to go, but we do think it's an important technology to support and a very big opportunity for our industry and transportation in general to decarbonize. And so while governments are supporting it and industry is supporting it, we're there also to support it with the kind of components that they need to go along with the fuel cell and provide a system in total for delivering the fuel from the tank to the fuel cell.

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

Just wanted to follow up on the HPDI business. I think you talked about stronger order activity you expected in the second half. And could you just maybe clarify that a little bit in terms of do you see pre-pandemic levels, kind of getting back to there or do you see growth beyond that? And sort of how fast is that ramp looking to you at this point?

Yes. Thanks for the question, Rob. Good to hear you this morning. So fundamentally, I see no -- from 2018 when we launched to 2019, we saw significant growth. And we forecast going into 2020 that growth would continue and that we would see further increases as the product gains traction and LNG infrastructure builds out, and so that was kind of our plan. Clearly, the COVID crisis, pandemic, there were actions around the world, the shutdowns of our customers, the shutdowns of our plants, just punched a big hole in our plan. But what we see actually is that with the order that we're receiving in Q3 and Q4, we have an opportunity to make up for those losses in total and perhaps do better than our original plan. So there's lots of work to be done and nothing's done until it's done. But overall, the outlook is quite positive for the next two quarters.

Okay. Great. Great. And then, and you touched on it a little bit, but just wanted to get a little more detail on the activity by the industry in responding to these environmental regulations. How much are other partners, potential partners looking at LNG versus hydrogen? And is it a both kind of discussion or are they picking one technology versus the other?

Yes. I think one of the things that's clear to all the companies that we work with around the world to explore, develop and bring to production our technology is that our technology is ready, it's validated, it's well known, it works, it has a low total cost of operation, the refueling infrastructure's there and their customers are seeking it. So this is mounting day-by-day, quarter-by-quarter. And we took, of course, a big pause because of COVID in terms of that ground swell and that activity as customers and us, we all constrained our working hours and focused on keeping our companies going in the COVID period. So we're seeing that come back and now time has passed and the requirements of 2025 and 2030 are closer than they were before the pandemic. And so I think we're a known quantity. There's been a lot of discussion, as you know, in Europe around hydrogen's right there or electrification's right there, we should do that and we could just skip LNG. I think there is growing realization, in fact, that those products aren't available right now and that 2025 is closer than you thought and that our product is something that's ready, it can be deployed in response to that. So I'm overall bullish and don't have any announcements to make today, but look forward to a chance to make those announcements in the future.

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

With respect to your China efforts, you said you've received orders but not shipped them; is that correct?

So we received some and we've got some still to build. So this is the normal process, I would say, of filling the pipeline of the preproduction parts and then production-ready parts and then regular order flow. We are not into the regular order flow at this point in time. But we do have an order that's not yet filled that we'll fill likely in Q3.

Understood. So these are just like in the 10s, not 100s? I mean, is that the way to look at it?

Yes. I can't go into the quantities. But they're meaningful to us and they are representative of the launch similar to what we did with our launch partner in Europe two years ago.

Okay. Understood. That's good to hear. With these loans and grants, et cetera, that you obtained in the past few months, are there any particularly restrictive terms or comments associated with any of that, that we should be aware of?

Hi, Amit. No, there's no -- just regular commercial terms, nothing restrictive.

Okay. Understood.

Yes. Frankly, a lot of the loans we've gotten have really improved our cost of capital and extended our maturities. And so the government-supported financing has been really, I would say friendly to industry. And so we were pleased with what was on offer and glad to have been able to secure it with our team in Europe, for example, and as part of UBC also.

Understood. And then with respect to sort of the recovery you're seeing, you're back and sort of all your locations are open again, you're functioning, I guess at somewhat normal levels probably. From here do we see some sequential improvements for the remainder of 2020 compared to what we did in the second quarter?

Yes. So the crystal ball, of course, is never perfectly clear. But what we are seeing, as Richard mentioned, is kind of month-by-month improvements back towards, quote/unquote, normal levels. There's a lot of uncertainty in the market still. We have the daily reports of new outbreaks and new lockdowns and second waves and all these things, which really does weigh heavily on the marketplace. And of course, I think people also look at all the spending done by governments and think about the general economy and unemployment. So there's a lot of anxiety and uncertainty still to play out. But so far we're seeing step-by-step increases. To have a 56% revenue drop in Q2, typically our best quarter, is a huge blow to our company. I'm very, very proud of the work we've done to endure it and get through it with the liquidity measures and support of our governments and partners around the world. But we do see that recovery step-by-step, and we're hopeful that by the end of this year we can say that 2021 will be not just a normal year, but an up year for us.

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

Most of them have been asked, but a couple on my end. I think you mentioned in the prepared remarks about a reduction in price with HPDI. Did I hear that correct? And can you just expand on that if I did?

Sure. As a part of long-term supply agreement with Volvo, we did have -- excuse me -- with our European supply customer, we did have some price reductions that were structural. The way you can think about that is low volume, higher-price; higher volume, lower-price. It's pretty normal in the business. And we've been seeing those and having to explain those, if you will, as the quarter-over-quarter margins have been decreasing. The fix to that, of course, is to continue the volume up curve and get the cost down, bring the margin back. And so that's firmly in our plans and you'll see that unfold in the quarters ahead.

I guess maybe I would have thought the opposite would have happened, if the volumes are down, the price went down as well, but as the volumes rebound -- I just want to make sure I understand that. Was it just a cadence of time or straight volume? Is there like break points like every 6 months the price goes down regardless of volume? Or if they buy 100 units it's one price, if it's 500 units it's a different price?

Yes, I can't go into the details of the contract, obviously. But clearly what we've had is pricing at the start of production that's higher than pricing we have now. And that will stabilize and then we're doing the work to bring the cost down. So it was more a time-based contract than a volume based contract, but the fundamental was built on the volume, saying that the early units would have higher prices.

Got it. Okay. And then you mentioned Italy on the passenger car side was starting to do better. Are there any other markets that you're seeing as green shoots?

Yes. I think we didn't talk a lot about -- we talked a little bit about it. But India's a very important market for us, and they're, I would say, still struggling to come out of the crisis and the pandemic. But at the same time, the standards there that changed the game in India, played out without a change to the schedule. So that is the change to Bharat Standard VI. And this is a story really where basically the advent of Euro 6 brought -- and 6 means the cost of diesel engine, are going up quite dramatically because of the after-treatment that has to be added to meet that standard. And those costs being very high, people look for alternatives, and natural gas vehicles are an excellent alternative and they already have a significant infrastructure in place. So as a result of that, we're seeing strong demand for our product in that marketplace. And contacts from additional customers saying we need to offer the product, can you help us? And so it's really a very positive sign for us that the Bharat Standard VI was not delayed, but came into effect right in the middle of the COVID recovery on April 1 of this year. And so we're excited about the opportunities in that market. And we already have a very strong position working with really almost every single manufacturer in India to help them bring their natural gas products to the marketplace. In that market, for example, there are -- some of our customers have dropped diesel and gasoline entirely and all they're offering is natural gas and LPG vehicles. And so those kinds of changes are really significant and really bode well for our business.

Makes sense. It's great to hear. And then the last question I had is, you made reference to a possible subsidy or support around green initiatives for transportation in Italy, and I think you even said details are limited. But it's my understanding some of the other countries in Europe that have had COVID-related support for transportation was more around electrification. Is there anything in the public domain out of Italy that would suggest that LPG or any other gaseous fuel would be supported?

Yes. So our understanding of what's being developed, I do believe that I referenced in the opening comments, was a support structure for all sorts of technologies, including ours, which would also include the electrification, hybridization, the fuel cell vehicle, whatever. So I think they're taking an agnostic approach or even a comprehensive approach to those technologies that support their environmental goals and incentivizing the recovery of those disproportionately, which obviously works in our favor. A key ingredient is the government can put in, any government without anybody else, can put in a structure that says, here's an incentive for clean technology. And then it's really about what customers want to buy, what they can use and what's available for manufacturers. So if you incentive something that's not available, then nothing's going to happen. But our products are available on the marketplace and doing very well. So as an example, earlier this year, pre-COVID, there was some huge increase in the number of natural gas vehicles registered in Italy. I forget the number. It was above 50% increase in the registrations year-over-year. Again, that was a pre-COVID metric, but I think we quote it in our Q1 call, actually. But so the market's moving in that direction. And the kind of support we get from the government then applies to many technologies, including ours is what we expect.

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

Yes. Thank you very much. I appreciate everybody joining the call. As you can well understand, not just us, but around the world, COVID has been an absolute challenge for business and we're amongst that. I am very pleased with the work that we've done to get through it to take care of our team members, to support our customers as they close and reopen and their changing demand. And now we're seeing the recovery that gives us hope that the future is a greener future that we can support and grow into. So overall, I think we're through this crisis to a large degree. There's still some uncertainty in the future, but overall we're on a good path and I think we're well positioned to grow and prosper in the coming future. Thanks again for your time and support.

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