Good day and thank you for standing by. Welcome to the Westport Fuel Systems Q2 2024 Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Ashley Nuell, VP, Investor Relations.

Thank you. Good morning, everyone. Welcome to Westport Fuel Systems’ second 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, 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 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 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 will turn the call over to you, Dan.

Thanks, Ashley, and good day, everyone. Today, I’ll be recapping our progress and results in the second fiscal quarter of 2024, providing updates on our 2024 strategic priorities, including an update on the JV with Volvo introducing our new reporting segments and touching on the success of our July 4 event before turning the call over to Bill to walk us through our Q2 results and new segment reporting structure in more detail. Q2 was a solid quarter, demonstrated by improvements in our margins. Impacting results was the launch of the JV with the Volvo Group. During the quarter, we were excited to close this HPDI JV transaction, which resulted in us recognizing 2 months of revenue from the Heavy-Duty business and our results. Beginning in June, the HPDI JV was accounted for under the equity method of accounting for investments. The improvement in our margins and adjusted EBITDA we saw in the quarter reflects the initiatives we have undertaken to reduce costs and streamline our business along with initial results from our more recent growth initiatives such as our LPG fuel system sales to our OEM customer. Our revolving business strategy has long recognized the value of strategic partnerships and our collaboration within the HPDI joint venture exemplifies this approach. By aligning with the right partners, we amplify our strengths and leverage shared expertise to drive innovation more efficiently and effectively. As we continue to adapt and refine our focus, we have restructured our business into 5 key segments: The HPDI JV, Light-Duty, High-Pressure Controls and Systems, Heavy-Duty OEM, and Corporate. This reorganization strengthens the alignment between our competitive strategy and our internal operations, positioning us to deliver sustainable profitable growth over time. Our new structure empowers our team to be more agile, accountable, and sharply focused on achieving…

Good morning and thank you, Dan. I want to start off by walking through the new segment reporting structure. As Dan mentioned, we’ve refined the way we view and report our business operations. Beginning with this quarter, we’re reporting financial results under 5 new segments. These segments are the HPDI JV, Light-Duty, High-Pressure Controls and Systems, Heavy-Duty OEM, and Corporate. Financial results from the HPDI joint venture being counter-form under the equity method and are also supported by enhanced disclosures in our MD&A as well as in the notes to the financial statements. Before I go over the quarterly results, I want to delve deeper and walk you through what is included in each of our new segments. First, the HPDI JV represents our recently closed joint venture with Volvo Group. The financial information presented represents 1 month activity during the second quarter. Light-Duty segment manufactures LPG and CNG fuel storage solutions and supply fuel storage tanks to the aftermarket OEM and other market segments across a wide range of brands. The Light-Duty segment includes the consolidated results from our delayed OEM, independent aftermarket, light-duty OEM operations, fuel storage, and electronics businesses. Our High-Pressure Controls and Systems segment designs, develops, produces, and sells high-pressure components for the use of hydrogen and CNG fuels in transportation and industrial applications. Finally, our Heavy-Duty OEM segment reflects the results from the HPDI business for the first 5 months of the year until the formation of the HPDI JV, which occurred on June 3, 2024. And going forward, the Heavy-Duty OEM segment will reflect revenue earnings from a transitional service agreement in place with the HPDI joint venture. This TSA is intended to support the HPDI joint venture in the short term as the organization transitions to its own operating entity. Therefore, after completing…

[Technical Difficulty] to advancing decarbonization across the mobility sector remains steadfast. As we look forward, we are invigorated by the possibilities that the future holds and are resolute in our pursuit of innovation and sustainability. I want to take a moment to thank everyone for being here. And with that, I’ll turn it over to the operator to open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Eric Stine of Craig-Hallum. Your line is open.

Good morning, Eric.

Hi, Dan. Hi, Bill. Good morning, can you hear me? I know there’s some weird stuff going on, on this call, but audio wise. But okay, good. Well, so I know early days for the joint venture, you’ve had – or it’s been in place for, what, 2 months. Just curious if you could kind of rank the priorities as you see them now. Have they changed at all? And could you give us an update on just thoughts of a new OEM since I know that, that was one of the objectives from the start.

Sure, sure. In terms of priorities, we’ve launched this joint venture and our goals immediately are to get it functioning as a stand-alone business. So putting in place the business systems, the ERP, all of those things are being put in place so that we can operate it separate from Westport management team was already organized around a separate entity. There’s about a 9-month rollout of actions that make all those things happen to stand-alone. So immediate priority is getting it functioning and running. But running parallel and equaling priority is bringing on a second OEM. And that activity continues. It’s been ongoing for some time. It was ongoing before actually, we closed the joint venture and it continues to be ongoing. And we’re hoping that we’ll be able to announce something as we continue to work towards winning that second OEM, which is a priority for both Westport and Volvo.

Got it. And then I have heard some talk in the market interest in HPDI in North America. And so I’m just curious, maybe this hasn’t changed from when it was part of Westport. But now that you are combined with Volvo in the joint venture, maybe how those plans are coming together? Does this help in that endeavor to get it to North America and what that might look like?

Sure. So HPDI North America is one of those equal priorities, whether it’s bringing on a second OEM or bringing the technology to North America through Volvo. We’re – we continue to work through engineering and development to build a system that can cross all the continents, but specifically in North America, we see the market is more CNG-focused. And so we’re working on a plan to fill that need and talk to other OEMs in North America. So our commercial activities will continue to move forward in building this business out.

Got it. I will – I guess, I’ll stay tuned on that. And maybe my last one, just more bookkeeping. So when we think about OpEx and just the moving pieces of the – of Westport going forward, so you said you had $2 million that was – that should not repeat. Was I correct in hearing that related to the formation of the joint venture? Okay. So $2 million.

Yes.

And then it looks like roughly $5 million, $6 million of the Heavy-Duty OEM business, that would be roughly the OpEx level that also comes out. I mean is this kind of an all-in OpEx $15 million type of number per quarter?

We’re continuing to look at that. As Dan mentioned, we still have quite a few cost reduction initiatives that we’re working on. And so we’re – that’s across our business. $15 million is about right for the current run rate, but we’re going to continue to evaluate that.

Okay, thank you very much.

Thanks, Eric. Take care.

Thank you. Our next question comes from Chris Dendrinos of RBC Capital Markets. Your line is open.

Yes. Good morning.

Good morning, Chris.

I wanted to ask about – there was a comment, I think, it was in the financial disclosure of the MD&A, and it looks like you all exited the JV with Weichai. So if you could speak to that and what maybe the strategy shift was there and, I guess, thoughts going forward with them? Thanks.

Well, I mean it’s really two separate things. This is a JV that was formed a long time ago. And then more recently, we had a small ownership percentage, and they finally exited totally from the joint venture. However, that doesn’t change our relationship with Weichai and we continue to support their development activities.

Got it. Thank you. And then maybe just on the Light-Duty segment. So it sounded like the mix of Light-Duty OEM was more heavily weighted to Europe and you noted a reduction in the sales in some of those developing regions. Is there any sort of a strategic shift going on with, I guess, maybe that business line? And maybe where you’re focused internationally and how that impacts your growth going forward? Thanks.

Sure, sure. So the Light-Duty business impacts this year, so Q1, Q2 and will flow through for a bit. The primary one was the OEM that imports vehicles and installs our systems. And they tripled the size of their business, and they are launching 14 new models in the middle of all this. And so the issue there was they were uncontrolled sitting on a pile of inventory that they didn’t realize they had. So, they are bleeding that off. So, the big hit we are taking there is just them bleeding off that inventory. We expect those volumes to come back. We are waiting to see exactly when they are going to come back later this year, but we do expect them to come back. The other piece was the slower launch on the Euro 6 with our OEM over there. And that has actually picked up and will be gaining volume. So, we are actually fairly upbeat about the volume projections for Europe. But we are waiting to see specific numbers from the marketplace on that. So, we don’t see a major shift in the piece of that world that we play in. In fact, we see it getting a little bit stronger.

Got it. Thanks. I guess maybe one last one if I can sneak this in here, but I think there is a receivable from – there is a receivable from Cummins that I think you...

Our next question comes from Colin Rusch of Oppenheimer & Company. Colin, your line is open.

Hi Colin.

So, give this another go. Thanks very much. So, guys, can you talk a little bit about what’s going on with the vehicle customers for hydrogen on the off-road opportunity? It seems to me that as the mining industry starts to work towards zero emissions and the hydrogen industry starts to look at some dedicated facilities that there might be a meaningful opportunity for you guys. I just want to understand how that’s developing.

Yes, sure. So, we have been exploring opportunities in the off-road. Off-road is a growth segment, both inside the joint venture for HPDI and within our high-pressure components and systems world because there is a play there for that technology. We do see some interesting opportunities coming together and have been in some discussions with some customers on how to help the mining industry transform their technology. So, it’s early days for us on that, but it is an important priority for us, and we are starting to build out the commercial plan of how to pull it off.

Thanks so much. And just on the light-duty side, it seems to me that there is an opportunity around potentially licensing some of the IP that you guys have and ending up with a little bit leaner model. Can you talk a little bit about that opportunity and if that’s a real thing that you guys are thinking about?

About licensing, okay. So, we are currently building out the capitalization of Euro 6, Euro 7 technology that’s going to be ramping up over the next 2 years, 2 years to 3 years. And that’s been our primary focus. In terms of licensing, I am not sure who or what you are specifically referring to, but our goal is to expand that technology across multiple OEMs. We do see a pendulum swing back the other way as I think the world sees the hydrogen ecosystem may be a little further out than we all want. In the middle of that, we have solutions, whether it’s propane gas, natural – the natural gas groups, etcetera. And we are trying to position ourselves to be that bridge in between and bring solutions. So, we are going to continue to try and commercialize that across Europe, and of course, in our aftermarket around the world.

Thanks so much. I have got a couple of follow-ups. So, I will take them offline. Thanks guys.

Yes. Okay.

Okay. Thank you.

[Operator Instructions] And our next question comes from Rob Brown of Lake Street Capital Markets. Your line is open.

Good morning.

Good morning.

First question is on the sort of demand environment in the European HPDI market. I think that’s been sort of coming back. But what’s sort of your sense on how that looks over the next 12 months and some of the macro drivers there?

Yes. I think obviously, I mentioned just a moment ago, the view of where hydrogen is going to be coming in, in terms of the ecosystem, the entire ecosystem. I think the European market is starting to adjust to that future being a little further off. Therefore, they are turning back to the alternative fuels aside from the fuel cells and the battery electric solutions. Clearly, alternative fuel ICE engines are going to be gaining some momentum and some market share in Europe. And we are excited about that. We are also working to figure out how to get it in North America, how to commercialize it with different OEMs in North America, including Volvo. But I think the current HPDI system on LNG has a very strong future here in Europe.

Okay. Thank you. And then on the cost reduction efforts, you talked a little bit about some progress, but could you give us a sense of how – sort of how far you are into that and how much is yet to go?

Yes. We have been digging in pretty aggressively across the company, both at a corporate level for corporate costs, which Bill can talk a bit about. And then operationally across the various segments, whether it’s the light-duty business or even the joint venture, we are trying to make ourselves a much more right-sized and efficient business across the board. And one of the challenges is, I think we have talked about in previous calls, is the timing of making change in operations. So, for instance, in Europe, a lot of the cost savings that we want to initiate there, take capital and take time. You can’t just hit a switch and cost – take costs out of a business in Europe like we could here, for instance. So, are we a third of the way into it, probably, I would say we are a third of the way into it. And so – and it’s also a balance, right, a balance between where we are cost cutting, where we are investing for the future to take advantage of growth opportunities. So, it’s a bit of both.

Okay. Great. Thank you. I will turn it over.

One moment. Our next question comes from Jeff Osborne of TD Cowen. Your line is open.

Hi Jeff.

Thank you. Good morning. Thank you. Two questions, one is, do you have a sense of – on the kits that are in inventory at your partner in Europe, what you have sold in versus the sell-through of those vehicles and how long that pressure will be there? Is that something that will be resolved this calendar year or no?

Yes, we expect – yes, go ahead, Bill.

Yes, it’s – I can answer. So, yes, it heavily impacted our first quarter. It did – we did have some impact in the second quarter – early in the second quarter. We actually started seeing the volumes start ramping up throughout the quarter. And those will continue to increase throughout the third quarter as we work closely with our customer. As Dan mentioned, they have just grown rapidly, and they haven’t put the controls and processes in place to manage their inventory. So, we have gotten more actively engaged with our customer to be able to manage that and we have better foresight for their needs, their production needs, inventory needs. So, that business has been recovering during the quarter and will continue in the third quarter.

Perfect. And then my last question is just how to think – I think Eric asked questions on OpEx and how to think about that and how you are aiming to reduce that. But how should we think about CapEx for the second half, that’s unclear to me. Maybe it’s buried in one of the documents. But what is in the split of CapEx for associated with the JV?

Well, I think a big chunk of the CapEx investment this year – historically, we have been in, call it, the $13 million to $15 million. It’s going to run a little higher this year because we have been investing in CapEx to support the – our OEM customer for LPG components for Euro 6. So, we have been investing heavily in new CapEx. I think for the back half of the year, it would just be slightly lower than what we spent in the first half of the year. And then I think that will be the bulk of the CapEx spending that we need to do to support our OEM customer for delivering six components. And then as we go through this, we will have to recast our CapEx run going forward now that the – all the HPDI activities are in the JV that will decline as well.

So, is it feasible that, that number could be less than $10 million next year?

It could be. But we are actually just kicking off our annual budget process. And as part of that process, we do a deep dive in what our CapEx needs for the various programs. And so we are going through that right now.

Perfect. That’s all I have. Thank you.

Okay.

Thank you. I am showing no further questions at this time. I would like to turn it back to Dan Sceli for closing remarks.

I would like to thank everybody for joining us today. And I hope we answered all your questions and look forward to the further calls throughout the day. That’s all. Thank you.

This concludes today’s conference call. Thank you for participating and you may now disconnect.