Caroline Sawamoto - Manager, IR and Communications Nancy Gougarty - CEO Ashoka Achuthan - CFO Andrea Alghisi - COO.

Rob Brown - Lake Street Capital Markets Eric Stine - Craig-Hallum Capital Group Jeff Osborne - Cowen and Company.

Thank you and good afternoon. Welcome to the Westport Fuel Systems First Quarter Conference Call, which is being held to coincide with the press release containing Westport Fuel Systems' financial results that went out earlier this afternoon.

On today's call, speaking on behalf of Westport Fuel Systems is Chief Executive Officer, Nancy Gougarty; Chief Operating Officer of the Automotive and Industrial Segment, Andrea Alghisi as well as our Chief Financial Officer, Ashoka Achuthan.

Attendance at this call is open to the public and to media, but questions will be restricted to the investment community. You're reminded that certain statements made in this conference call and our responses to various questions may constitute forward-looking statements within the meaning of U.S.

and applicable Canadian securities law and 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 would now turn the call over to Nancy Gougarty. Please go-ahead ma'am..

Thank you very much. Good afternoon and thank you for joining us to discuss Westport Fuel Systems' first quarter results. Today we're speaking for our third full quarter as a combined company.

The past 12 months have not been without their challenges, but today, I am more confident than ever that the company is on the right path to becoming a sustainable, profitable company that can deliver value to customers, employees and shareholders. When I first spoke to you last August, we laid our several clear goals.

Firstly, focus on our product portfolio and sell non-core assets. Secondly, align our cost and revenue and capture the benefits and synergies of the merger. Thirdly, improve our balance sheet and fourthly, the advancement in bringing HPDI 2.0 to market.

I am pleased to be able to report that we have made substantial progress on the path to meet these goals and while we continue to focus on achieving these goals, we remain agile and ready to ensure that we are able to adapt to ever-changing business environment.

We have made the decision to exit our industrial business, the first step of which was the sale of our APU assets. The decision was a result of a comprehensive review of our entire portfolio that began last summer. The industrial segment is a good business that is it adjusted EBITDA positive.

However, when we looked at our core skills, the competitive dynamics of the end markets, the size of competitors, this knowledge, plus our thorough assessment made our decision clear for Westport Fuel Systems to exit this segment.

Though it is taking time, we are purposeful and deliberate to ensure that Westport Fuel Systems gets the maximum shareholder value for these industrial assets. The cash received through the APU asset sale is meaningful and improves our balance sheet.

It also allows us to concentrate on growing market share for our unmatched proprietary alternative fuel technology as well as bring new products to market that can drive results for the long term. It is our knowledge, technical expertise, deep portfolio, OEM relationship that make Westport Fuel System, the global leader in our markets.

Turning to Slide 4 as you know I have more than 30 years' experience working in the truck and automotive industry, but you can see in this slide, we have assembled an executive team that brings similar knowledge to what it takes to be a Tier 1 supplier to a global OEM and we're working together to deliver operational excellence for our entire global organization.

On Slide 5, I would like to spend some more time talking about the new Westport Fuel System and what we consider is our core portfolio as our highest value statement. This focus comes from our portfolio reviews. Our global automotive segment is delivering improved operational performance with higher adjusted EBITDA contribution.

The Cummins Westport joint venture, which showcases our technology and how to partner with the leading OEM is also paying us quarterly dividends.

And thirdly, our corporate and technology segment including HPDI and other technologies, in this segment, 2017 is a milestone year as we'll be shipping our first HPDI 2.0 commercial components later this year. This will provide our first commercial revenue and allow us to dramatically reduce our R&D cost.

This is a key step in turning this segment into a profitable contributor to our bottom line. Moving to Slide 6, the automotive segment, the automotive segment provides a range of products for propane, natural gas and even hydrogen.

This is a global business with Europe representing about 65% of the sales, followed by the Americas and Asia at approximately 10% each and the U.S. representing approximately 7% of the automotive revenue. As a global business, each region has its own characteristics, fuel price differential, government policy and fueling infrastructures.

We understand the specific market characteristics in order to best serve them. Since the merger closed, we have taken several initiatives to improve our competitiveness in the market. These actions include consolidating our operating footprint, reducing our operating costs and restructuring our global purchasing and inventory system.

The results have been an improvement in adjusted EBITDA with a business that is more in line with its current revenue and positioned to benefit when the market fully recovers. On to Slide 7, our Cummins joint venture, Westport joint venture delivers consistent dividends even with challenges of oil prices.

We are also excited with the initial response of our zero-equipment emissions engine and the joint venture continue to provide a stream of earnings, plus potentials for years to come. Ashoka will talk more about CWI in his section.

And turning to our corporate and technology segment, this segment is where we have developed new technologies for the transportation industry, including HPDI 2.0 as seen on Slide 8. This is the most immediate and exciting technology that we have right now and later this year, we'll be shipping our first commercial component to our launch partner.

This is a combination of many years of dedicated and determined work to bring HPDI 2.0 to market. I am proud to say that the team has worked through challenging that have come with bringing new technology to market. We have taken the setbacks and lessons learned in build off of them in order to provide better product.

We have met the rigorous standards that our OEM partners and customers demand and are excited to provide a game-changing technology that will allow users to reduce their fuel cost, while making a meaningful reduction in their greenhouse gas emissions.

Our OEM partners plan to launch the technology in the European market where the heavy-duty truck shipment typically ranges between 225,000 to 275,000 units per year and the taxes, cheap diesel prices elevated and greenhouse gas reductions are valued more than another market.

I can't overstate the importance of this milestone for the company, bringing new revenue streams in for component sales and licensing revenue and also allowing us to reduce significantly our R&D spending. This first program was unique and we needed to make a substantial investment to develop and bring to market this first of kind technology.

As we work with other OEMs however, our work book continues to be funded by these partners and commercial opportunities known. For example, we just recently executed a development agreement and beginning work with a leading OEM to develop their engine using technology to meet their country's new emission rule similar to Euro 6.

Our OEM customer came to for our industry knowledge, our engine development technical expertise, proven components and engine management system plus our track record. We have clear scope of what needs to be accomplished and we are funded for the entire project and there is a clear path for a supply agreement.

This is the way that the new Westport Fuel Systems will be working. Before I turn the call over to Andrea and Ashoka, I want to reiterate that we are excited and energized as we lead the shift in the global transportation system from petroleum to clean gaseous fuels of all forms.

We do this by commercializing our unique technologies, bringing to market no compromised products that offer compelling emissions and greenhouse gas reductions. We have the fundamentals in place and Westport Fuel Systems is moving in the right direction. With that Andrea, over to you..

Thank you, Nancy. Now starting on Slide 10, as you've seen in our financial statements, all of our industrial segment is now recorded in discontinued operations. So, my comments will be about our global automotive segment.

Please note that our global automotive segment now includes the electronic business as well as the high-pressure components, which had previously been included in industrial. All numbers shown have been adjusted to reflect their addition. My comments will compare the first quarter of 2017 to the fourth quarter of 2016.

Because the merger did not occur until June 2016, the results of the first quarter of 2016 are less meaningful for comparative purposes. As Nancy stated, since the close of the merger we have undertaken a number of initiatives to improve our operating performance and reduce our costs.

This is included for our stats like consolidating our operating footprint and eliminating redundancies, but also exploiting technical levers like product redesign and make versus buy and commercial levers like strategic sourcing and supplier negotiation to improve product competitiveness.

We have additional efforts underway and we have implemented a program of operational excellence. My colleagues and I have learned over years in the industry, you cannot control market cycles, government policies or commodity prices. You can only control how you operate and deliver to your clients.

Now turning to the performance in the first quarter, revenues were down from the fourth quarter due to weaker sales in the compressor business and in the high-pressure business as well. However, leaseback performance to recover in the second quarter.

Gross margin of 25% were arrived from prior quarters as a result of the efforts to better control our product cost. I am pleased to report that our adjusted EBITDA for the automotive segment was $3.6 million or 6.4%, a significant improvement from prior quarters and a reflection of the efforts and actions taken since the merger closed.

As we look out at the rest of the year, we currently see stable markets and expect automotive segment revenues of between $200 million and $230 million.

Looking at 2017, there are some outstanding tenders that could provide some tailwinds, while there are some market that might weaken and there is a potential for some of our new programs to push into early 2018 if the OEM delay them, so those could be some advantage.

Please note that there is some seasonality in this business as well and all the squeal we expect higher revenues in the first half versus the second half and typically the September quarter is the weakest due to summer holidays and production changeovers.

When we look at our automotive segment, we expect and target these as a pattern between 7% and 10% adjusted EBITDA margin business, with volumes, product mix, product cost and topic efficiency as the key drivers of the range.

We have initiatives underway to improve our adjusted EBITDA margin and we are targeting to be well within that range in 2018 and beyond. I'll now turn the call over to you Ashoka..

Thank you, Andrea. My comments begin on Slide 12, as of March 31, we had cash and cash equivalents of $47.7 million down from $60.9 million at the year-end. This does not include the cash we received as a part of the sale of our APU assets, which as you know closed on the 20 April.

While the gross proceeds of that transactions were $70 million, our net proceeds were approximately $60 million after transaction fees, deal costs and a holdback of $7 million with the release milestones over the next 24 months.

After the deal closed, we made an $8 million prepayment of royalties payable to address our collateral obligation to [Caucasian] Capital. With respect to the sale of the second non-core asset, I can say that we are in active negotiations with the potential buyer.

Please note that the industrial businesses are now reflected as discontinued operations in our financials. The first fourth quarter revenues for these businesses were $17.5 million and had they not been reported as discontinued operations, our first quarter revenue would have been $77.5 million.

We are also ahead of our initial scheduled for capturing synergies from the merger and now expect to exceed the original $30 million run rate savings target by the end of 2017.

At the bottom of the slide, you'll see our consolidated adjusted EBITDA for the current and the past four quarters, which shows a loss of $4.1 million in the first quarter of 2017.

We're seeing a positive trend; however, I do want to point out that the first quarter was helped by an HPDI program, progress payment and also the timing of certain expenses. We do not expect the second quarter to be strong -- as strong as the first, as we do not have a similar progress payment and we have some higher development costs.

Basically the 2017 quarterly adjusted EBITDA is going to fluctuate as we work through the final stages of the commercial launch of HPDI 2.0, but what is important is that we're moving fast towards profitability and expect to be adjusted EBITDA positive in early 2018. Now turning on to Slide 13 which shows our CWI joint venture.

Revenues and shipments were up from the first quarter of 2016 on improved performance in the U.S. offset by continued weakness in certain international markets. Gross margins were 30.8%, up from the first quarter of 2016 primarily due to lower warranty costs, which are now at more normalized levels.

R&D expenses of $10.8 million are higher due to engine development costs. CWI has evaluated R&D and sales and marketing costs over the past two years as the company launched its near 6.7-liter engine, spent R&D dollars to incorporate onboard diagnostics and develop the new zero equivalent emission engines.

We are almost through this higher spent however, and by the second half we'll be trending back towards spending levels seen in prior years. CWI's new 2018 product line is a very significant milestone in product development for the company.

These new engines mean our customers can choose the most affordable pack to zero equivalent emissions with no commercial constraints of supply or technology readiness. I know some of you on the call attended the ACT show in Long Beach last week and you may have firsthand the owner operator feedback.

We think these engines are game changing and are excited about the prospects for the joint venture in the coming years. Turning to Slide 14 which shows our SG&A R&D expenses from continuing operations by segment. Our SG&A costs are trending down; however, the first quarter 2017 was impacted by increased advisory fees and transaction related costs.

Rightsizing our cost structure remains a key priority. As an example, we had another round of headcount reductions in March and we will continue to take appropriate steps needed to align our costs with our revenues.

R&D spending was $12.2 million down from prior quarters in part due to timing, but a majority was the result of actions taken to focus our R&D efforts. As in prior quarters, corporate and technology segment accounted for the largest component of R&D, mostly related to our HPDI 2.0 program.

For the next three quarters of 2017, we expect to see similar levels of R&D spending through launch after which the spending will drop off considerably. We expect 2018 R&D spend for our corporate and technology segments to be at about half the levels of 2017.

Of course, new programs could add to this, but as Nancy made very clear, any new R&D programs in our corporate and technology segment will be funded by third parties.

Turning to Slide 15, which shows our quarterly cash walk starting with 60.9 million at December 31, 2016 we received $3.8 million in dividends from joint venture spent $1.7 million in net credit paydowns, spent $2.6 million on restructuring payments had an increase of $4.1 million working capital.

Capital expenditures were down was $2.2 million down slightly from recent quarters due to timing. We expect to spend an additional $17.5 million in capital expenditures in the rest of this year of which about $14 million will be spent in the second quarter.

This spend is needed to successfully launch HPDI 2.0 to meet our launch timing and to be able to service our current launch partner and future HPDI programs for other OEMs. It's an investment in our future, but it is not regarding amount. Much like R&D, it is limited to 2017.

We expect to spend only $5 million on capital expenditures in all of 2018, most of which is related to maintenance spend for our global automotive business. Our cash used in operations was approximately $6.4 million. We closed the quarter at $47.7 million which as I mentioned earlier does not include the cash we received from the recent asset sale.

Moving on to Slide 16, as Andrea said, we expect our automotive revenues to be between $200 million and $230 million for 2017. Revenues from the industrial segment including any related to the transition agreement will be recorded as discontinued operations. With the sale of our industrial segment, we do lose some adjusted EBITDA contribution.

However, I want to reiterate what I said on our last call, that our goal of reaching adjusted EBITDA breakeven and then on to full profitability remains our most pressing target and we expect to be adjusted EBITDA positive on a consolidated basis in early 2018. Finally, we will compete our actions to address our balance sheet.

We're off to a very good start in 2017. In March, we refinanced the €10 million European credit facility for five years at similar terms. In April, we received a net of €60 million from the sale of our APU business.

We do have approximately 40 million of debentures coming due in September, but we've been approaching this from multiple angles and the cash received from the recent asset sales only expands our options. We are in discussions with the existing holders about rolling over or extending all or some of the debentures.

We're also far along at other options including refinancing them through additional asset sales, cash from potential licensing agreements, a new loan or credit facility or capital market transactions and it is possible that the solution will be a combination of all of these elements.

What is important to note however is that we're looking for a finite amount that is not an open-ended need for more cash while we develop new technologies.

We have two strong businesses that are sources of cash flow and value and we had HPDI technology that we believe will start producing significant value for Westport Fuel Systems in the coming years. We have and we will take -- continue to take the necessary steps to put the company on a sustainable path.

The options I listed will be a bridge to 2018 when we will be adjusted EBITDA positive with growing HPDI 2.0 revenues and our legacy restructuring spend behind us. With that, I'll turn the call over to the operator for questions..

We'll now begin the question-and-answer session. [Operator instructions] The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead..

Good afternoon..

Good afternoon..

Just wondering if you -- on HPDI program, you're talking about shipping later this year, could you maybe just give us some parameters about how that kind of ramps into 2018? Is it initial product this year and then production product next year? Can you give us some idea of how that HPDI program ramps?.

Nancy, would you like to take that?.

Yes, I will -- I've got some -- Rob, first of all thanks for your question and as you know we're really quite excited about what's going on with HPDI, but the way it rolls out in calendar year '17 we are building some early protection units and then rolling into what we call regular production.

But our OEM partner will be I think shortly here making some announcements related to the actual marketing plans. So, we're preparing our suppliers and preparing and getting the supply system ready in part 10-Q in order for us to meet these initial builds that will happen in the latter part of calendar year '17..

Okay. Good. Thank you.

That's helpful and then on the other HPDI programs you're working on, could you give us a sense of how many are active at the moment and maybe give us a some sense on when they on the timeline is for product much is there?.

Well a couple things to be said. I think that as we're working in terms of HPDI, what we're finding is that the transportation and the tracking piece is one of it, but we're also finding some very interesting dynamic from off vehicle application as well as in rail.

So, I would be -- I think a bit remiss to give you the total numbers that we're working with several people in these various areas.

I would tell you that the good news is that because we've done all the heavy lifting relative to the validation and reliability testing for all the HPDI components the good news is it's now getting the products to market because its application work in these circumstances.

We're able to get the product to market in a much quicker fashion than what we did with our original launch, which meant that we had to do all the component validation and then do the vehicle validation activity in addition to that. So, I think that what you will see is over the next years several opportunities that can rollout.

Now it really again as you know, we're the Tier 1, so this is really up to the OEMs relative to how they want to put this product in their portfolio, but I would say in general we're highly encouraged relative to HPDI being a technology that is key for their alternate fuel technology, primarily because it has such good performance relative to the diesel product..

Okay. And then just one more quick question on the R&D spending, I think you mentioned that corporate spending will come down by about half once that HPI program rolls down, what's kind of the baseline there of spending that you're running at..

Yeah let me take that Rob. we've obviously not released figures or guided to figures for R&D spend, but you can expect our ongoing spend to be somewhere you can tracking to about half the levels that you're seeing in the corporate and technology segment today..

Okay. Good. Thank you. I'll turn it over..

The next question comes from Eric Stine with Craig-Hallum. Please go ahead..

Hi everyone.

Listen Nancy you just answered a part of this question, but related to that new OEM agreement that you just disclosed today, and given that it's at 2.0 in that platform and it speeds the timeframe, are you able to kind of give some thought about when you think that could move from development to supply agreement may be too early, but just wondering if you could provide any color there?.

First of all, Eric, thanks for the question, let me try to answer this and I think there are some other folks in the room that probably can chime in, but part of the development agreement we have to find in there that actually moves us into a supply agreement arrangement.

And I would anticipate that that's going to happen within calendar year '17 that the supply agreement activity will get going.

Again, what we wanted -- I think it's important that we are a full system and full solution provider meaning that we really what in addition to being able to do the development work, we want to supply agreements to go along with it.

So, as I stated, so the new Westport, both getting customer funding, but also making sure that we're able to bring meaningful revenues through is really been key to us. So, we have now structured our agreements in phases in order for us to be allowed and to ensure that the supply agreement is going to come along with the development activity..

The only thing I would add to that is, this is Ashoka, the only thing I would add to that is this is not an HPDI program that we were reporting to..

Okay. Understood. Okay. Good.

That is helpful and then maybe just turning to HPDI given that you are approaching volumes, initial volumes with your lead customer, just curious is that -- have you noticed any other OEMs that are moving faster as a result is a C Volvo about to come to market?.

I would tell you that each OEM has their own view relative to this and we had lots of discussion with them about it fits into their portfolio.

I would say more highly encouraged in the European market that because of some greenhouse gas and CO2 initiatives that we're going to see it more in the near-term but, again as we always continue to say Eric and will continue, this is the OEM that meets their launch timing relative to this.

I would say as I mentioned in my comment to Rob that we are really very pleased because of the fact that we get such comparable performance in terms of range as well as for vehicle performance to diesel that this provides -- this alternate technology has lots of advantages over other things that OEMs can initiate.

So that is one of the things at least on the trucking side that we're finding to be one of the calling card that's making it really interesting..

Right. Okay. So maybe last one for me and I did jump on late, so I apologize, if you touched on this but the industrial piece and discontinuing that, should we take this as a that there are certainly more to come or at least that would be your objective..

So, Eric in the showcase portion, he did mention that we're in the last, we're in negotiations with party to sell another portion of our industrial asset..

Right. Okay.

So, you had previously talked about to you solely PUC you have the other one, I was just curious, do you see within industrial others beyond that or is the one non-core asset sales that you're in final stages, does that incorporate the rest of the industrial the discontinued operations?.

Right now, the only thing that's in discontinued operation is those that are part of the industrial group, but I would tell you that we continue to look at our portfolio and there are some other opportunities and again in certain cases we're looking for some market opportunity for them and as they become ready for us to move out into the market, we will certainly let you know that..

Okay. Thank you..

[Operator instructions] The next question comes from Jeff Osborne with Cowen and Company, please go ahead..

Hey good afternoon, couple questions on my end, I was wondering if you could talk about the CWI near zero engine any sense of preliminary interest or backlog is open that part a of the question and then for Ashoka, how should we be thinking about in 2018 gross margins for CWI as that engine ramps up, is there a larger warranty reserve and then we should be factoring that into our assumptions..

Thanks for your question Jeff. Let me take the first one first, which is interest in the zero equivalent engines that CWS just launched. As you know, the 8.9-liter product is available today and the 12-liter version of the zero-equivalent engine with the launch later this year or very early next year.

Very positive reaction, I don't know if you were there at the ACT in Long Beach last week, but we were extremely impressed with customer reaction people see it as a game changer and most importantly it offers them a real alternative to zero equivalent -- as a zero-equivalent option with no commercial constraints to supply all technological readiness compared to the other zero option -- zero emission options that may be available.

So very positive and we expect that to contribute very favorably to both the topline on the bottom line going forward.

Your second question on the gross margins year we expect to see continuing strength on gross margins as these engines come on stream, but more significantly, we expect our operating margins to improve because of that used to ongoing R&D spend.

As you know, the past year and this year have been significantly impacted by the spend related to the development of these engines both the new 6.7-liter engine as well as the zero equivalent versions of the 8.9 and the 12 liters and plus a fair amount of engineering spend related to ongoing -- onboard diagnostics, which are required for engines in 2018.

Once that will be behind us, which we expect will happen in the middle of this year, you can see a significant drop off for both R&D and SG&A spend going forward as well..

Got it.

That's helpful, maybe one for Andrea or anyone can jump but is there a sense on the automotive side that you could give the rough mix that you expect or you saw in 2016 on a combined basis for the two companies, what the mix is of delayed OEM and retrofit kits for the vehicles?.

Thank you, Jeff for your questions and I heard correctly the Ike asking for 2016 or 2017?.

Maybe just I am just curious what the rough mix is maybe in the quarter for 2017 would be helpful. I don't need exact numbers, but just a perspective of what you anticipate between those three segments..

Well I would say that the 50% of our business is after market and let's say the other 50% is share among let's say 3D businesses, so one is OEM, the second is delayed OEM and the third one is what we call diversified businesses.

So, the OEM is another together with the delayed OM is another let's say 25%, 30% and the last 20% is diversified businesses. Some of them are complementary because they are for example we have what we call a service business which allows us to give more revenue stream to our dealers in Italy..

Got it and Ashoka any sense of perspective of the remaining assets that you had sell in terms of size, is that half the size or similar to what you've already done with the ATE segment, my assumption is it's much smaller but I just wanted to if you had any comments on that..

Not unreasonable as I mentioned Jeff, bear in mind we have reclassified almost the entire piece of the industrial segment as discontinued operations. So, you can draw your own conclusions from that in terms of what is left after the APU sales.

There is a very small piece of the form industrial business the rolls into automotive and that has to do with electronics. But as Nancy mentioned besides these, we have a couple of businesses that are potentially non-core as well..

Makes sense, the last one quick I saw the automotive service revenue as the highest it's been I think in three years, what was going on there? The MD&A is at $3.7 million..

So that was a milestone payment from our customer, related to the HPDI program..

Got it. Okay. Thank you..

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

Thanks for joining the call today everyone. If you have any follow-up questions, please feel free to reach out to the Investor Relations team. Thanks again for your interest in Westport Fuel Systems. That ends our Q1 call today..

Thank you to everyone for joining us today. If you have any follow-up questions, please feel free to reach out to the Westport Fuel Systems Investor Relations team. Thanks again for your interest in Westport Fuel Systems..