Good morning. My name is Enes, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Westport Fuel Systems Q1 2024 Conference Call. [Operator instructions] Ms. Ashley Nuell, you may begin your conference.

Thank you. Good morning, everyone. Welcome to Westport Fuel Systems' First Quarter Conference Call for 2024. 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, Daniel 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 are reminded that certain statements made on this conference call and our responses to certain questions may constitute forward-looking statements within the meaning of 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, Daniel.

Thanks, Ashley. Good day, everyone. Today, I will be recapping our Q1 results and providing color on our 2024 strategic priorities. I will also be sharing an update on the JV with Volvo and touching on the recently announced zero-emission vehicle or ZEV legislation. Then I'll turn the call over to Bill to walk us through our Q1 results in more detail. So touching first on our financial results. Q1 2024 revenues were down 6% year-over-year, primarily due to decreased volumes in our delayed OEM business as a key customer works through their existing inventory, although we are seeing volumes begin to tick back up here in May. On the cost side of the equation, we have been aggressive in cost cutting and have begun to make changes. As you well know, some of these adjustments will take time before we see the benefits in our financial statements. As I mentioned at year-end, nothing is off limits with respect to reducing expenditures. We have been reducing costs everywhere from the Board level to the shop floor. I will dig into some examples of where we are seeing success and where we'll be putting more pressure in just a moment. In my first 3 months in the role, I established 3 main priorities for 2024 and beyond, including, number one, driving success via our HPDI joint venture with Volvo; number two, improving operational excellence; and three, reimagining our hydrogen-powered future. To ensure that Westport creates value for our shareholders, we need disciplined operations that flow from a strong strategic plan. These priorities are consistent with that need and are expected to elevate the performance and value of our business long into the future. As you know, we signed the investment agreement for our HPDI joint venture in Q1 and are in…

Great. Thank you. Good morning, and thank you, Dan. In the first quarter of '24, we generated $77.6 million in revenue. This is a 6% decrease compared to the prior year period. This decrease was primarily driven by a decline in sales volumes in our delayed OEM and, to a lesser extent, in our fuel storage and our light and heavy-duty OEM businesses. Partially offsetting these declines were increased sales of our electronics products and an increase in our independent aftermarket business, where we saw our sales increase in North American, Western European and South American markets. Gross margin decreased to $11.7 million or 15% of revenue in the quarter. This is down from $13.3 million or 16% of revenue in Q1 of last year. This decline is primarily driven by the reductions in the Q1 '24 revenues, which were partially offset by an improvement in sales mix to higher-profit markets in our independent aftermarket business. Our adjusted EBITDA loss increased by $2.1 million to $6.6 million. In the quarter, we had about $1.5 million of costs related to severance and outside services associated with closing the joint venture. Going forward, we expect to see a reduction in outside services once the joint venture is closed. OEM revenue for the first quarter of '24 was $49.3 million, down $7 million compared to the prior year period. In the quarter, sales volumes decreased in our delayed OEM, fuel storage and light-duty OEM businesses. Our heavy-duty business sales volumes decreased, which were partially offset by higher engineering services revenue. Sales volumes in our Electronics business increased, driven by higher sales to one of our key customers. Gross margin in our OEM business decreased in the quarter to $4.5 million or 9% of revenue. This compared to $8.1 million or 14% of revenue…

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. Although revenue was a miss this quarter, it wasn't permanent. And we're making the necessary changes to optimize operations, cut costs and ultimately close on the HPDI joint venture. Our short-term goal is to stabilize the business. Long term, we will be focused on building a sustainable and profitable future. Driving our 3 key pillars with a culture of discipline and excellence, we'll deliver the objectives we established. I want to take a moment to thank everyone for being here today. And with that, I'll turn it over to the operator to open the call for questions.

[Operator instructions] Your first question comes from Colin Rusch with Oppenheimer.

I appreciate the comments around customer inventories. Can you talk a little bit about what you're seeing in terms of sell-through on that inventory and when you think it will be fully cleared?

Bill, you want to jump in on that one?

Sure. Yes, no problem. So we're already starting to see those sales starting to pick up for demand. This is a customer that has just grown significantly in Italy -- in the Italian market, and they're going through some growing pains. And so we're there to help them and -- through their process. They're just -- they procured too much inventory and they're working through that. And we're starting to see that come back online, where we're starting to see orders for those kit inventories to be delivered. And that will continue to ramp up in the back half of the quarter.

Okay. And that's some very specific stuff. But yes, in general, one of the things that we have done is implemented an inventory committee because we -- inventory is one of our top priorities, working capital, obviously, overall, it's top priority for us. And we are digging in and setting new targets to manage inventory better, having a better connection between a customer order and a supplier order to be more disciplined in how we manage inventory overall.

That actually is a good dovetail into my second question, which is really around working capital. So as you guys look forward, how big an opportunity is there over the next couple of quarters to generate cash from the balance sheet and the existing working capital exposure.

I think we do. We've made a lot of progress calling over the last, call it, 12-plus months and improving our working capital and continuing to generate that and turn that into cash. We still have a lot more work to do. As you saw, we had a fairly significant reduction in our receivables during the quarter, which definitely helped from a cash flow perspective. But I think inventory is an opportunity for us to continue to reduce our net working capital, enhance our liquidity. And as Dan mentioned, that's a high priority for us to go tackle that and try to reduce inventory, improve turns, but it's going to be a team effort to drive down the inventory to levels that we can efficiently manage what we can still deliver on our customer demands.

Yes. Let me comment just a little bit more on that because one of the things in -- when I talk about driving discipline in our business is making a lot of these processes, the routine and not the exception, not seeing something and going, oh boy, we got too much inventory in this. What are we going to do about it? We need a process that ensures that, that buildup doesn't happen in the first place, then we manage that balance between order from customer to order to supplier and make it the routine, not the exception.

Your next question comes from Chris Dendrinos with the RBC Capital Markets.

I guess I wanted to begin here. You had some commentary in the prepared remarks around your China partner. And so I guess I wanted to go back to that. And specifically, I think you mentioned you're discussing the work and some obligations that each of you all have moving forward. So could you maybe discuss that in a bit more detail, what are the kind of commitments or obligations here from the parties? And maybe how should we think about things progressing?

Sure, sure. Well, let me start with -- in terms of production or we have no production orders from them currently in the system. We have had more development orders for development on their engines, and that's going to continue. We're trying to work with them on planning and crafting where that development is going to go down the road.

Okay. And then maybe shifting gears a little bit to the H2 opportunity and you highlighted maybe $70 million of revs by the end of the decade. I guess maybe what's sort of underpinning that assumption set? And then what's the cadence or how are you guys thinking about the cadence of that opportunity? What are the kind of levers that would, I guess, accelerate that opportunity going forward?

Sure. Yes, the H2 numbers we're talking, these are the components that go into the hydrogen systems, and we were selling to the big Tier 1s globally. And they have -- we have been obviously working on development projects with them. And now we're getting production purchase orders and prototype purchase orders to take those forward into production and on a number of OEM platforms. And what we're finding is that the hydrogen components under GFI are qualified as the best globally. And so we're getting a lot more opportunities than we can actually handle. And so as the hydrogen ecosystem evolves, these components are going to play a key role in ramping up production in the next few years.

Your next question comes from Rob Brown with Lake Street Capital Markets.

I just want to follow up on kind of the cost cuts. I think last time you talked, you were still getting into it, but do you have a sense on maybe the goals on the cost cuts ultimately or sense of when you can get to profitability?

Yes. So I mean, our goal is -- first of all I'll talk very generally about what I call flexing our costs. As -- when you're in the automotive and mobility markets, volumes can go up and down, and we need to have an underlying system, a disciplined system that flexes our cost with those volume changes up and down. What we're doing right now though is stabilizing the business by reducing our cost to the level of the business we're in right now, followed by a process or a system that will flex those costs on an ongoing basis. Sort of like I mentioned on the inventory. We need this flex management to become the routine and not the exception. We can't wait until the end of the quarter and see the numbers and go, okay, we need to do something. It needs to be a day-to-day effort. But in the meantime, this first short-term goal is to get the overall cost aligned with the size of the business we have. Clearly, our cost and our overhead were far too high for the business we had, and we're making those adjustments.

Rob, and I think on your question is it's -- we're not going to be able to cut our way out of this. We need to grow the top line as well. So it's going to be a balanced approach between cutting cost, rightsizing the business, but we also have to focus on growing the top line to get profitability.

Okay. And then on the -- I guess, the European heavy-duty market, I think it was down in the quarter you mentioned, but I think there's some signs of life in that market. How do you see that market recovering and growing into this year?

Yes. We're -- I mean, we're all watching every day what's happening both in the heavy-duty and the light vehicle markets on volumes. It's pretty volatile. Our goal is to be prepared if the volumes do come that we're prepared to supply it whatever the customer needs. Do I think the market is going to rebound in heavy trucks? I'm hoping so. I don't have that crystal ball. We rely completely on our OEM customers to let us know exactly where they're going and what they plan on for volumes.

Your next question comes from Amit Dayal with H.C. Wainwright.

Dan and Bill, with regard to the Euro 6 and 7 deliveries, have they commenced -- you had highlighted that these deliveries potentially would be beginning in 2024. So just wondering where that is.

Euro 6 has begun. Euro 7 is going to be ramping up. We did see a bit of a delay in the launch of some of the new programs with our OEM customer, our biggest OEM customer over there, but we do expect those to ramp up faster now that the delay has put some pressure on them in the marketplace. So Euro 6 has started and Euro 7 is coming.

I know the first quarter was a little bit weaker year-over-year. But for 2024, should we continue to anticipate year-over-year growth as some of your -- the customers who may have delayed orders, et cetera, come back and other initiatives sort of start ramping for you guys?

Will, you want to?

Yes, I'll start taking that. So on a yearly basis, it's going to be a little bit of a challenge in Q2 from a reporting standpoint and to provide transparency on the business as it is today and what the future business looks like and what is the future as we sit here. We're expecting to -- clearly, Q1 was a weak quarter, and we do expect Q2 to pick up, which is with the seasonality, that's typically what we see in our business where it ramps up in Q2, and we'll see that drop in Q3 just because of the seasonality in most of Europe is on holiday and then we'll see business ramp back up in Q4.

Just one last one for me on the China side. This was a big part of the narrative a few years ago, and then there wasn't much progress. This time around, is there potentially a way to sort of accelerate this relationship and opportunity from development-type work into production orders. Just trying to get a sense of whether this is coming back to potentially really contribute in terms of revenues and margins, not in 2024, but maybe 2025 and beyond.

You know what I think --

What are the catalysts that are driving sort of this service revival in this relationship and opportunity?

Yes. So I think when you said 2025, I think you hit it right on. I think that's when we're still working engine development activities. And we don't know or can't speak to specific timing of when that customer will kick off production of that model. But we still have a good relationship. We're still doing development work. They're still looking to use our technology for the new platform. And -- but as I said earlier, we have no orders today on production for -- within 2024, but the development will continue in a positive way. We're still working very well with them.

Your next question comes from Jeff Osborne with TD Cowen.

Just 2 quick ones on my side. I was wondering, Bill, if you could frame the OpEx run rate post the announcements that you detailed on the call. Is there a way to think about the dollar value of costs that's been taken out of the business?

Yes. Right now, we're not in a position to quantify what that is. We expect to see as we progress on these cost reductions, we do expect our G&A sales and marketing run rate to decline on a comparative basis. And I suspect we'll huddle up internally and on future calls, I'm sure we'll continue to provide updates on how we're progressing on our cost reduction initiatives.

And would there be any --

And the scope -- sorry, let me add to that. The scope of our cost reduction activities, as I said in the opening, it's from the Board right down to the shop floor, there's nothing off limits, and we're very aggressive in cutting the costs. And as you know, many times when you go about this, you're taking on a bunch of onetime costs to get there. We're still mapping out the run rate, but we're in the middle of this cost cutting, right? It's an aggressive effort across the company. And as we get through it, we'll get a better feel for what it's going to look like longer term.

Got it. I assume you couldn't touch on, is there any cash severance that we should be modeling in or onetime charges for the upcoming quarter?

I think from one time, severance, I don't expect it to be significant. We did have some severance, as we mentioned in the first quarter. In terms of onetime costs, we're still -- as you mentioned, we're still incurring outside services related to the joint venture to the finish line and getting that kicked off and that we should start seeing that taper off in the third quarter.

And my last one is just, is there any notable technical progress that you could update us on the hydrogen ICE engine platform more broadly?

Yes. I mean I think -- I don't know if you saw the latest market news or OEM customer has announced continuing development of hydrogen and how it plays -- the hydrogen ICE engine plays a key part in their strategy going forward. We're hearing that from a number of OEMs. So we're getting an awful lot of interest in the hydrogen HPDI as a solution for the next 5, 10 years. So yes, it's -- the development is continuing, and it makes us very optimistic about the longer term.

Your next question comes from Mac Whale with Cormark Securities.

Just one quick one for me. Dan, I'm just wondering, as you rightsize the organization, where do you think the biggest risk lie for the business? Is it potentially a negative impact on sales? Or is it that you make these changes and don't get any impact on margin. I just want to understand the risk versus the goals you're after?

Yes, sure. So that's one of the reasons it's not like hitting a light switch, Mac. We're looking at each part of our business, each discipline, each region, figuring out where we can cut without affecting our ability to continue to grow the business. As Bill said, we can't cut our way to prosperity. But we have to rightsize the business. So each discipline is being looked at to get it rightsized to the business we are today with a view forward to where the growth opportunities are. So while we're trying to corporate overhead as an example. We're trying to get that rightsized and where on the technical side, the engineering side, we're keeping our team focused on these big development projects. As we talked about, we have a bunch of big development projects that are really going to lead to our future. So we're not cutting those, but it's just rightsizing every discipline to the business we have.

Okay. And then just as a follow-up, Dan. Can you put a time line on how long that takes? Like is there a sort of -- is it a couple of quarters? And then you're in this new sort of organizational structure, and then you expect maybe a year or 2 to get a benefit from that? Like what's -- how should we be thinking of that?

Yes, that's probably a good way to describe it. I think that the corporate type cost cutting is happening faster than some of the operational cost cutting because while we look at our operations to get those fine-tuned, you can't cut them as fast because you're delivering product every day. So to me, it's 2 different buckets. Getting the corporate to overhead rightsized, we can do pretty aggressively the operational stuff takes longer, putting in place some of the disciplined manufacturing processes we want to use, as I mentioned, like inventory management and getting that process between when a customer orders and we order from a supplier, getting that efficiently balanced Those things take longer time. So it's going to be into next year before we see some of those benefits. We'll see the corporate cost cutting benefits by the year-end, and then we'll roll into next year with the continued focus on the operational side.

Your next question comes from Eric Stine with Craig-Hallum.

So I know right here at the end of the call, most everything has been touched on. But just curious, the Chinese OEM, I mean, this is certainly the most you've talked about it in a long, long time. And I know that LNG sales in China are quite high, and the outlook there is very good. I mean, do you -- am I off base in thinking that this kind of -- I don't know if it's a reengagement but pickup in engagement has to do with LNG? And I ask because -- and this is before your time, Dan, but at one time, the view is Weichai might just skip LNG altogether and just move to hydrogen. And it strikes me that potentially that's kind of being rethought that LNG is very viable and attractive opportunity.

Yes. I think -- I mean, I think LNG in the Chinese market as a whole is going to be continuing to grow and the transition to hydrogen just like everywhere in the world, there's a balance between when infrastructure gets in, when the price of hydrogen comes down. All those things have to align for hydrogen to take off, and it will. In the meantime, LNG is going to be the growth piece for China. And so the great thing is that our technology can run both, right? It's a -- we call it the bridge technology. It can run all of the different alternative fuels. So we -- and that's why I keep stressing that. We don't have any orders right now from Weichai for production. We've been shipping them development parts for trials. We're continuing the development work. And our -- we're optimistic that we will get through the development programs and into production at some point, but we don't have orders today.

Thank you. There are no further questions on the line. Please proceed.

All right. Well, thank you very much, everyone, for your questions. I know I'll be talking to a bunch of you throughout the day, and look forward to it. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.