Good morning, ladies and gentlemen. My name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to Westport Fuel Systems Q4 2023 Conference Call. Note that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] And I would like to turn the conference over to Ms. Ashley Nuell. Please go ahead.

Good morning, everyone. Welcome to Westport Fuel Systems' fourth quarter conference call for the 2023 fiscal year. This call is being held to coincide with the press release containing Westport's financial results that was issued yesterday. On today's call, speaking on behalf of Westport is Chief Executive Officer and Director, Dan Sceli; and Chief Financial Officer, Bill Larkin. Attendance on this call is open to the public, but questions will be restricted to the investment community. You're reminded that certain statements made on this conference call and our responses to certain questions may constitute forward-looking statements within the meaning of the U.S. and applicable Canadian Securities Laws. And as such, forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. With that, I'll turn the call over to you, Dan.

Thanks, Ashley. Good day, everyone. I'm pleased to join you on my first call as CEO and Director of Westport. Today, we'll be covering our strategic objectives from 2023, recapping our highlights from last year, and providing an outlook for 2024. I'll then turn the call over to Bill to walk us through our Q4 and annual results. I wanted to start by hitting some of the key highlights and top line numbers for 2023. With the recent announcement of the signed investment agreement, we are excited to be in the last stage of finalizing our HPDI joint venture to accelerate the commercialization and global adoption of Westport's HPDI fuel system technology for long-haul and off-road applications. We are now working towards closing the joint venture and ensuring it's set up for success from day one. Touching on our financials, for the full year we generated revenue of $331.8 million as compared to $305.7 million in 2022. In addition, we continued to delivering improved gross margins, both in dollar terms and as a percentage revenue, with total gross margin for 2023 of $48.9 million, or 15% of revenue, as compared to $36.2 million, or 12% of revenue in 2022. We improved our adjusted EBITDA over $6 million -- by over $6 million to a negative $21.5 million in 2023 as compared to a loss of $27.8 million in 2022. My first two months with Westport have been a great adventure. I have visited all our main facilities, gained a deep understanding of our technology and products and learned about Westport's strengths and what improvements need to be made to optimize our productivity. After assessing Westport's current situation, I established three main priorities for the company in 2024 and beyond. Including: number one, driving success via our HPDI joint venture with…

Good morning. And thank you, Dan. In the fourth quarter of 2023, we generated $87.2 million in revenue. This is a 12% increase compared to $78 million in the prior year period. For the full year, we generated revenue of $331.8 million, this compare to $305.7 million in 2022. For the fourth quarter, the revenue improvement was primarily driven by an increase in our light duty OEM volumes, electronics business, and engineering services from the heavy duty OEM business, which were partially offset by lower sales volume in the independent aftermarket, heavy duty OEM volumes, delayed OEM, and fuel storage businesses. In our independent aftermarket business, increased sales volume in Europe were more than offset by lower volumes for Africa and South America. Gross margin increased $8 million or 9% of revenue in the quarter. This is up from $4.6 million or 6% of revenue in Q4 of 2022. Gross margin for the full year was $48.9 million or 15% of revenue as compared to $36.2 million or 12% of revenue in 2022. Higher sales volumes across multiple businesses and increased gross margins in our heavy-duty OEM business driven by the higher engineering services revenue drove improvements in our gross margin. However, the gross margin was offset by higher production costs stemming from global supply chain challenges and inflation, specifically in logistics and labor costs. We're continuously working with our customers to pass through the impacts of cost increases where we can. Lastly, we did record $5 million in inventory write-downs during the fourth quarter of 2023, which $4.5 million related to our heavy-duty business and negatively impacted our gross margin. Including the impact of the inventory write-downs, gross margin for the quarter would have been approximately 15% of revenue. In the fourth quarter of 2023, adjusted EBITDA was a…

Thanks, Bill. Finally, I wanted to close on a few key points. Westport is part of a compelling industry with a bright future. And we are driven to make a material impact on the decarbonization of the transport industry. The magnitude of this impact will only grow as we deliver our products to more customers. Although we made considerable progress in the second half of 2023, regarding our strategic priorities and implementing operational efficiencies, achieving cost reductions, and strengthening our balance sheet, we recognize that our work is not done. We remain committed to enhancing our core capabilities, learning and evolving as a company, and seizing new opportunities for continued growth and value creation. In the near term, we are focusing on cutting costs and optimizing operations. Nothing is off limits. We have already begun to identify and eliminate redundancies, and we are looking at spending throughout the organization. Additionally, better inventory management is key. These are only a few examples of the areas we are targeting to improve Westport's overall profitability. I want to take a moment to thank everyone for being here today. I'm excited to be on this call and energized by and committed to Westport's bright future. With that, I'll turn it over to the operator to open the call for your questions. Thank you.

Thank you, sir. [Operator Instructions] And your first question will be from Amit Dayal at H.C. Wainwright. Please go ahead.

Thank you. Good morning, everyone. Dan, on all the cost-cutting initiatives and gross margin improvement initiatives, could you give us any sense of where you might arrive at in the next 12 to 18 months in terms of operating costs and gross margin levels?

So I'm not going to get into any specific numbers. As you know, I've been on the job here for a couple of months and I'm digging in hard and getting the team circled around the wagon so to speak to identify and focus on areas of redundancy, of open capacity, of cost cutting. We're going through that process very aggressively, and we will be executing many of those initiatives throughout the next six, nine, 12 months. But I can tell you that my approach is one of operational excellence. And we will be driving that through the organization to ensure that everything we do, we do professionally, very well and efficiently. And the benefits will come out of that.

Understood. With respect to inventory write downs, is there some additional costs on that side that could be coming down the line or are we done with whatever needed to be addressed?

Bill, you want to take that one?

Yes, I'll take that one. We continue to evaluate our inventory across all the businesses. And as of right now, that's based on the assessment that we did resulted in the write down during the quarter. We'll continue to assess our inventory levels, our customer commitments going forward, and we'll continue to monitor it at this point. I'd like to say, I don't expect any future write-downs, but we are a manufacturer. We do supply components, and we typically do have some level of write-downs each quarter.

Okay. Thank you, Bill…

But not in the sense [indiscernible] during the quarter.

Right. Understood. Just last one for me. For 1Q 2024, should we expect a bounce back in gross margins?

Well, I mean, if you...

Compete to 4Q.

Well, I mean, if you exclude the write-downs, that write-down is going to have improvements in our gross margins. As Dan said, we're looking at reducing our cost structure across the entire company. And it's -- over time we would expect to see improvements in our gross margin, but as of right now, a lot of those improvements will be dictated by the timing of executing and implementing those initiatives across the company.

Okay. Understood. That's all I have [Multiple Speakers]

Okay.

Thank you. Next question will be from Rob Brown at Lake Street Capital Markets. Please go ahead.

Hi, good morning.

Good morning.

And welcome, Dan. As you kind of move into the Volvo JV process, could you give us a sense of sort of how the first year or so of that JV should look and ramp? And what sort of your expectations coming out of that over the first 12 or 18 months?

Sure. In the first 12 months, it's really getting the organization up and running as a standalone entity, ensuring that all the business processes, the policies, procedures we need to run a standalone business are in place. The product that we're shipping today, it's the product we'll be shipping next quarter. It's the building the business around it with our partner and making sure that's all organized well and running And then, of course, we're going to continue on developing technology and building the future for the joint venture.

Okay, good. And then on China I wanted to clarify your comments that the China sort of activity there you said was running a little behind schedule. How do you see that playing out and is there enough visibility to sort of say 2025 or is it still unclear on how that ramps?

Well, the changes in the Chinese regulations are having us on the product that we've been developing, having us go through some new regulatory testing and certification. It hasn't changed the timeline of our development of these new hydrogen components. It just delays how fast we can put them into the market. And there's no sense having a plant sitting there empty while we're going through a certification. We're just timing the move into the plant with the certification and the production just to ensure that we're efficient in managing our costs. The timeline of our development has not changed. We're developing the hydrogen products and those will be going to the market in China.

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

Thank you. Next question will be from Eric Stine at Craig Hallam. Please go ahead.

Good morning, everyone.

Good morning.

Good morning.

Hey, good morning. So just wanted to clarify. So with the JV, and I know in that first 12 months it really is focused on how do you get it set up? How is everything working together? But just to be clear, I mean, that really shouldn't impact the volumes that you would be shipping to Volvo today, right? As you said Q1 will be the same model that you have been shipping the on and off engine components. Is that how we should think about that? And with that in mind, what is your expectation for those volumes in 2024?

Yes, we're getting -- obviously, we're getting regularly informed by Volvo of the volumes they need of those components. We don't see any changes from what we're building today. We're in fact hoping to help them move even more product. That's one of the goals of this joint venture. But the volumes will not change from what we're shipping today. [Multiple Speakers] Of course, I mean, over time, that's going to grow, but immediately it's a pretty steady state.

Sure. I'm just trying to get a sense here of the near term as you kind of get into that changeover. Maybe, I know you called out or Bill called out lower HPDI volumes in Q4. I mean, just curious, does that have anything to do with the joint venture timing? Is that more the model change or how should we think about that?

Yes. No, the volumes aren't driven by the JV activities. Our goal is to have a seamless transition so there is no disruption in delivering components and systems to our JV partner, to our customer. And so, that's what we're focusing on. We will go through a transition period, but ultimately, we expect one of the outcomes of entering into the JV is to drive higher volumes, which for our business, volumes solve a lot of issues in terms of driving top line growth [indiscernible]

Yes, understood. Okay. And then lastly, just on the LPG programs, good that you started those in Q1 here. Can you just remind us, I know that it's the Euro 6 and the Euro 7, it's over the next four to five years. You called out to -- I believe EUR255 million. Can you just give a brief reminder on how that kind of should break down, at least as your expectations are today.

When you say breakdown, do you mean by period?

Yes, by period. I mean, obviously, it starts in 2024, probably heavier in 2025. Just some high level discussion of that.

Yes. I think we're going to see clearly a ramp up this year in delivering components to our OE customer, and we expect that increase to continue in 2025. And then we get the -- and then we start seeing just slight increases from there, but we will see a big jump this year, a big jump next year, and then somewhat stabilizing beyond 2025.

That's a pretty quick ramp up into their capacity numbers and then it will run.

Okay. Thank you.

Thanks, Eric.

Thank you. Next question will be from Chris Dendrinos at RBC Capital Markets. Please go ahead.

Good morning. Thank you.

Good morning.

I wanted to go back to Amit's question here just on the priorities and then the objectives to kind of improve that operational excellence. And I guess maybe just a bigger picture question, but maybe looking out 12 to 18 months, like how do you envision this? How does this company look then versus today? Are there sort of big changes that we see, or is it more of like this kind of gradual progression and just kind of want to get your perspective on what you foresee with Westport in the future? Thanks.

Sure, sure. Over the next 12 to 18 months. I mean, we're going to be instituting things like harmonized metrics across the operations to drive performance. We're going to be trying to optimize our capital -- sorry, capacity utilization. We're going to be looking at balancing overhead costs to the businesses. It's just what I call operational excellence drive to go into every corner of our operations and put in place a discipline that will drive performance. And it takes time, it's not a next week, next month thing. And there's a lot of really good things that we want to optimize and continue, and there's some things that we need to fix. And we will drive those in a manner that it can be executed without causing any issues to customers or supply. And that's kind of my approach. It's my theory of operational excellence and driving it across the business.

Got it. Okay. And then I guess, follow-uping on that, is there an opportunity to consolidate some of the -- I guess the manufacturing footprints? I think you mentioned capacity utilization and then are there leases or anything like that that sort of, I guess, maybe slow that transition? Thanks.

Yes, as I said in my earlier talk, nothing is off limits. We're going to be looking across the entire enterprise for areas to become more efficient and consolidation is always on that list that we look around and figure out what's the best setup and footprint for the long haul and we'll be evaluating that.

Got it. Okay. And then maybe just separately, as far as the marine opportunity goes, can you just provide a bit more color on what is going to be, I guess, tested and sort of where this opportunity falls within the marine segment? Is it commercial applications? Is it more like a residential or retail, I guess, opportunity?

No, no. It's commercial applications and it'll follow -- these are diesel engines and it'll follow a similar path to the engine development we would do for any mobility customer. You're taking our HPDI technology which can be developed for various types of diesel engines. And these things take some time, obviously, working with the customer for design development and then trials. So it's going to develop over the next couple of years.

Got it. Thank you very much.

Thank you. The next question will be from Colin Rusch at Oppenheimer. Please go ahead.

Good morning. This is Lydia on for Colin. Could you speak to the non-HBDI hydrogen revenue you're currently seeing and the scope of the opportunity?

The non -- so the light duty business, is that what you're referring to, or the aftermarket?

Light duty business, correct.

Light duty business, yes. So the light duty business is with Euro 6 and Euro 7 and the launch of our new business with our OEM customer. We expect this year the ramp up of that technology into the marketplace and it will happen fairly quickly. And I don't have the exact numbers in front of me here of what that'll do. Maybe Bill has some exact numbers, but the growth is pretty substantial for us.

Great, thank you. And then as a follow-up, as you're looking at optimizing your supply chains on the natural gas vehicles, could you give us a sense of the scope of the opportunity to drive cost reduction? And then maybe the operating leverage potential for the platform as revenue grows?

Yes. So on our supply chain, I'm not going to get into any specific numbers that we're expecting to get from managing our supply chains, but it's a continual part of my overall operational excellence initiative, includes the supply side of optimizing the logistics, the cost of the product, cost reduction efforts, those types of things. And we take the same approach to our suppliers as we do to our own operations.

Thank you.

Thank you. Next question will be from Jeff Osborne at TD Cowan. Please go ahead.

Hey, good morning. I had a couple questions on my side. I was just curious if there's any update after you've had two months on the job? And I imagine connected with some of your leading partners on the ICE engine side. Any updates around the commercialization timeline, especially just given some of the hydrogen infrastructure projects globally have been a bit delayed relative to expectations?

You mean beyond the Volvo joint venture?

Correct.

Yes. So we are continuing to do development across, as we talked about in the thing, in rail and marine and, of course, in the heavy truck markets and we're going to continue to do that. We're in discussions with other OEMs and we're going to continue to market and push the potential gains of that technology to those OEMs.

I was just trying to get at, you had some exciting announcements in sort of the October through December period. Do you anticipate those to be two to three year development contracts? And so we're really looking at the 2027 and beyond for those to come to fruition or what's your expectation of development cycles for some of the more recent announcements?

Yes, there might be. I'd have to get the specific timing for you, which we can follow up with, because marine, rail and the trucking industry all have somewhat different development cycles. And of course, from that comes different development times. And as you said, I'm here two months. So I haven't got that at the top of my head of what -- where we are and the timing of those and what the endpoint is, but I can certainly follow up with that.

No worries. Maybe two for Bill. There's, I don't know, six days left in the quarter. Can you give us any directional comments about how Q1 is shaking out relative to Q4, both from a top line and maybe a margin for seconds?

No, we typically don't provide any guidance, as you're aware. So we will go through our normal reporting cycle on that.

Got it. And then I assume the same is true for 2024. But is there any comments you can make on things that you can control? I understand there's a lot in noise you can't. It doesn't sound like you're willing to give OpEx because everything's under review, but you also have a moving part with the joint venture. So can you just give us a sense of like how much headcount expenses would move to the JV and how we should think about minority interest losses for that. And then maybe any comments you can on anticipated CapEx relative to the $15 million you spent last year and the $2 million in debt payments.

No. And I think we talked about this before. The closing of the JV, we do not expect to be able to consolidate the financial results of the JV. However, we're going to -- this process is going to change how we're going to report our segments going forward, I would expect. We expect we're going to provide more transparency to each of these businesses. So even though we're not going to be able to consolidate, we don't expect to be able to consolidate the joint venture. We'll provide a fulsome disclosure very similar to what we did with our CWI joint venture. So you'll be able to see, we expect to start disclosing volumes, revenues. You're going to be able to see the margins. Also, we are evaluating our other businesses and how do we break that out and considering -- looking at the hydrogen business and breaking that out. So we're working through that process right now and I would expect, after the JV closes, probably that subsequent quarter we'll start -- you'll start seeing that information broken out differently as we go forward.

Got it. Thank you.

Thank you. [Operator Instructions] Next will be a follow-up from Eric Stine. Please go ahead.

Hey, everyone. Yes, just a quick follow-up here. So more of a high-level question. I know for Volvo and this is joint venture, it's obviously the internal combustion engine, key part of their strategy going for differentiated product in the market. But whether it's Volvo's view or your combined view as a joint venture partner, what do you envision this being as a -- potentially as a percentage of the overall market as you see it developing going forward and you've got a number of technologies that are kind of in the mix for those future volumes?

Yeah, good question. And I think we'd have to defer to Volvo on that. They have the eyes and view of the market growth. They've been announcing their priorities and their focus. The exact or specific breakout of the HPDI technology versus the alternatives, I think you'd have to ask them and we're relying on them as the experts to know that market and hopefully optimize it in regards to the joint venture.

All right. I guess it was worth a try, but something we will stay team on. Thank you.

Thank you. And at this time, we have no further questions. Please proceed.

Ashley? So I think that concludes the day for us. I assume Ashley will jump on and do that stuff. But thank you very much for all of the questions and look forward to talking to you all again and we'll keep you in front.

Thank you.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.