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

Eric Stine - Craig-Hallum Capital Group Robert Brown - Lake Street Capital Markets Colin Rusch - Oppenheimer and Company Jeffrey Osborne - Cowen and Company.

Thank you for standing by. This is the conference operator. Welcome to the Westport Fuel Systems Third Quarter 2017 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions].

I would now like to turn the conference over to Ms. Caroline Sawamoto, Manager of Investor Relations and Communications for Westport Fuel Systems. Please go ahead..

Thank you and good afternoon. Welcome to the Westport Fuel Systems third quarter 2017 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 and 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 are reminded that certain statements made in this conference call and our responses to various questions may constitute forward-looking statements within the meaning of 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 will now turn the call over to Nancy..

Okay, thank you Caroline. Good afternoon everyone and thank you for joining us for Westport Fuel Systems third quarter results conference call. This was a good quarter for Westport Fuel Systems. Compared to a year ago our revenues and margins were up, our costs were down, and our balance sheet is stronger.

Our team is making good progress on a number of fronts. Before I report to you on our three business segments I would like to speak to you about what we are experiencing on a macro level across the transportation sector. As you can see from slide 2, the move towards zero emissions is no longer a secondary consideration.

OEM, government and end user are asking for products to provide performance, energy efficiency, and low climate impact. Fuel pricing differential is no longer the only key factor that drives adoption. Solutions need to provide economic benefits as well as environmental benefits and our business is well positioned to realize this shift.

We know that there is a range of alternative fuel technologies under development. And we think that there are a number of solutions that will take share of diesel. However, we know it takes many years to get through an R&D process and have a market ready product not just the concept. Our clear advantage is we have passed the proof of concept stage.

Our products are commercially available and able to meet the demands today and meet the requirements of the OEMs. We see many countries that are assessing their future options and many choosing natural gas as their leading alternative fuel.

We see growth in well established refueling network that already exists in many countries today notably in Europe and Asia. We are encouraged by this change and aligning our business to take full advantage of the opportunity before us. Let's get into the specifics of our three business units. Please turn to slide 3.

Starting with the automotive sector this segment is doing well year-to-date. We are expecting our segments revenue to be at the high end of guidance in light of our current run rate. We see significant improvements in adjusted EBITDA margins from the negative 0.2% last year to 6% this year.

We have done this by consolidating our operations, transforming our manufacturing footprint, enhancing our product competitiveness, while improving our purchasing processes, managing our working capital, and right sizing our workforce.

We know from our decades in the industry that we always need to focus on operational excellence and we are taking the steps that are in our control that which will continue to improve our overall performance and find additional savings. We expect the automotive business to have a 7% to 10% adjusted EBITDA margin in 2018 and beyond.

Turning to CWI, this joint venture serves us well. CWI had a great quarter which Ashoka will speak to you in greater detail shortly. Our joint venture CWI is a compliment to our other business interests in Europe and Asia. Our 50% ownership gives the U.S.

market precedence particularly given that CWI is the leading and in fact the only supplier in the medium and heavy duty natural gas engines to OEMs in North America. This positions us well for the growing shift towards their emissions in North America particularly in California which makes this state a critical market for us.

This is evidenced by the recent clean air initiative and related grant money as well as the approval of the clean air action plan calling on ports to replace diesel trucks to near zero or zero emissions over the next five years.

In our corporate and technology segment the biggest and most exciting news is that we have begun order fulfillment of our HPDI 2.0 commercial components. As you know our technology is capable of running on renewable fuels such as biogas an alternative fuel for diesel pilot fuel which cuts CO2 emissions by up to 100%.

This is supported by an early October announcement of the availability of an L&G gas truck in Europe. Much of the launch was highlighted on the fuel efficiency and performance which is on par with the diesel truck but a much lower climate impact. I expect that many of you have questions about our go forward sales outlook.

But as many of you know this is not information a tier one supplier can provide. However, we encourage you to follow along with the OEMs market as they market their new vehicles. And certainly exciting to see our hard work come to life through HPDI 2.0 and this reinforces how innovation is key to who we are.

Our R&D pipeline is strong whether it's HPDI, cryogenics, high efficiency spark-ignited, or next generation products. Some are in early development stages and some are in advanced testing stages but there is more to come.

Turning to slide 4, in addition to reporting on our three business segments I would like to speak to you about our progress towards reaching positive adjusted EBITDA in early 2018.

A few steps that we're taking that will help us reach this goal include first, we have improved the adjusted EBITDA margins in our automotive business as some of the initiatives put in place over the past year take hold and we work to streamline our operating cost.

Secondly, we have lowered our R&D spend on our corporate and technology segments concurrent with the launch of HPDI 2.0. This is combined with what I have said before which is a shift in our R&D funding model to where our partners carried the mass majority of the spend.

Third, we've made cost reductions in our administrative and general costs over the past year and continue to take steps to right size this spend. And finally we see improvements in terms of the contributions from CWI with their new engines coupled with lower R&D spend at the joint venture.

I now would like to hand things over to Ashoka to provide specifics on our Q3 financials before I provide final thoughts at the end of the call. Ashoka, over to you..

Thank you, Nancy. I'll begin with slide 5 which provides a summary of our third quarter financial performance. The third quarter of 2016 was the first full quarter of the combined operations post merger therefore this is the first comparable quarter on a year-over-year basis.

Over all we saw improvements across the board, increased revenue, improved gross margin, and strong adjusted EBITDA performance. Our balance sheet was also strengthened by the $29 million U.S. gross proceeds received from the equity issuance in July which allowed for the repayment of the $55 million Canadian debentures on September 15th of this year.

Moving on to our automotive segment on slide 6, as a reminder the transactions in our automotive business are mostly denominated in Euros. Compared to a year ago the Euro strengthened but approximately 5% against the U.S. dollar. Automotive revenues were up year-over-year.

Even excluding the foreign exchange impact we saw improved aftermarket sales in all geographical areas with the exception of South America. Revenues were down slightly from the second quarter of 2017 but as we discussed in the last call, the third quarter is typically a weaker quarter due to summer holidays and model year changeovers.

Gross margins were 24% in the quarter, a substantial improvement from a year ago due to operating efficiencies generated through post merger synergies and lower inventory provisions. Year-over-year SG&A costs were slightly higher mostly due to foreign exchange impacts and an increase in bonus accruals and some bad debt expense.

Automotive segment R&D was $1.1 million lower than the third quarter of 2016 primarily due to portfolio rationalization. The third quarter of 2017 adjusted EBITDA for the automotive segment was 3.8 million or 6% of revenues compared to a loss of 1.2 million in the third quarter of 2016.

As Nancy pointed out, we continue to take steps to improve our performance in this segment and we remain well on track to reach our target adjusted EBITDA margins of 7% to 10% in 2018 and beyond.

Overall in the automotive market we continue to see strength, in particular in Turkey and Eastern Europe and actually some improvement in Argentina since the beginning of this year as well. We are also seeing good order flow from some OEMs in Europe and India and an increase in orders for our hydrogen components.

As Nancy commented earlier we remain confident that we will meet our automotive revenue guidance of 200 million to 230 million and in fact with the current run rate we are seeing we expect to finish the year towards the higher end of this range.

Looking ahead to the fourth quarter the timing of some shipments including part of the NAFTAL award in Algeria and the impact of foreign exchange fluctuations caused us to be a little conservative in our outlook. Turning to slide 7 which shows results of CWR, our joint venture with Cummings.

Revenues were up year-over-year as the refuse market remained strong and we are seeing continued improvement in the trucking business. This was offset by some weakness in international market and the school bus segment.

Gross margins of 37% were up on higher parts revenue contributions and a favorable warranty adjustment which was a direct result of quality upgrades put in place to improve product reliability and durability over the past years.

Net income of 11.6 million more than doubled compared to the same period last year as a result of higher unit sales, increased gross margins, lower operating expenses, and the lower effective tax rate.

As stated in earlier calls CWI has had elevated R&D and sales and marketing costs over the past two years as the company launched its new 6.7 liter engine, incurred engineering expenses to incorporate onboard diagnostics, and develop zero equivalent emission engines.

This development work is now nearly complete and we expect to see a significant decline in these spending levels in upcoming years. Turning to slide 8 which shows our R&D and SG&A expenses from our corporate and technology segment.

Total R&D spending, the majority of which is related to our HPDI 2.0 program was 9.1 million down 3% year-over-year and down 9% sequentially due to the timing of certain expenses. We expect R&D to remain around these levels in the fourth quarter as we complete our HPDI 2.0 launch.

We are however targeting 2018 R&D run rates to be about half of that of 2017. Our SG&A expenses were down 32% year-over-year mainly from non-recurring merger related costs and restructuring activities incurred in 2016. Right sizing our cost structure remains a key priority.

We will continue to take appropriate steps as required to align costs with our revenues. Turning to slide 9 which shows our quarterly cash walk. Starting with 87.7 million as of June 30, 2017 cash used in operations and working capital was 7.2 million. We received 5.3 million in dividends from our CWI joint venture.

We had cash costs related to restructuring activities and transaction fees of 9.9 million. Capital expenditures were 3.8 million mainly related to equipment purchases to support HPDI 2.0 production. We received a net of 26 million from the July equity offering.

We had debt prepayment of a total of 47 million which included the payoff of our Canadian debentures and a prepayment of royalties to address our collateral obligations to Cartesian Capital. We closed the quarter with 51.1 million in cash. With that I will turn over the call to Nancy for final remarks. .

Thank you Ashoka and now we will move to slide 10. In closing I want to bring your attention to several items. Our technology is market ready today to meet the changing political and public demand for better environmental performance and lower climate impact.

We are adjusting to our new smaller size and we are achieving this through operation consolidation, restructuring, and absent sales. With this strategy we have in place today we are on path towards becoming a profitable, sustainable company starting with achieving positive adjusted EBITDA in early 2018.

Finally we are focused on our commitment to our shareholders and we will continue to provide updates on our progress as decisions are made and results are achieved as evidenced by our HPDI 2.0 launch. Thank you for your continued support and thank you for taking time to join us today. I look forward to speaking to you soon.

I will now turn the call back to the operator for question-and-answer session..

Thank you. [Operator Instructions]. Our first question comes from Eric Stine with Craig-Hallum. Please go ahead..

Hi Nancy, hi Ashoka. I just wanted to start with HPDI Volvos out talking about that LNG is the solution for the next 20 to 30 years, infrastructure development is in place and under way.

Maybe can you just talk about beyond Volvo, how discussions maybe over the last six months to a year have evolved, whether it's just because of the macro environment or for competitive reasons?.

Eric let me make a stab at this and Ashoka can weigh in as well. But I would tell you that there are a lot of dynamics that are going on in the industry that make HPDI a very favorite technology at this point in time.

Obviously the whole sense around alternative to diesels and when you get like diesel performance like we do with HPDI this is always a good offering. I would tell you the interest as you can imagine with the activities going on in Europe and the launch of the LNG truck, we have obviously our phones are ringing and people are quite interested in that.

But I would tell you that we're finding general interest across the globe also in light and medium duty as well in other -- some of our other technologies because people are really looking for solutions that are lower climate impact. And I think in general we're just seeing a big trends, fuel pricing is starting to climb that also helps us.

There's a variety of different things that are bringing good opportunities to Westport..

Got it, and maybe just sticking with that in terms of other markets beyond Europe. I know you no longer give volumes for Weichai Westport given the percentage that you own but clearly that market has strengthened quite a bit over the last year.

Any update you can give on that market for HPDI, I know you were working with Weichai and you may still be but just an update on how China is shaping up for HPDI?.

Well, you know what, if we look at any markets big users of LNG is obviously areas of our target, China being one of the major markets that is currently using LNG as one of the bigger fuels whether it's on newer technologies like HPDI or whether it's on other applications through the joint venture, the natural gas engines or other offerings in the market.

So I would say China still because of their infrastructure is a key market for us and we continue to understand what's happening in that market not only with the current production but also with what we're seeing in the attempts as we move forward.

And again low climate impact products are front and center to the government's thinking and that always accelerates things in the China market. .

The only thing I would add to that Eric is that the Weichai joint venture although we don't equity consolidate like we did in the past, we still have a significant interest in the company and as a customer as well.

As you probably know they are having an extraordinarily strong year and if run rates, current run rates are any indication they could exceed the unit volumes that they saw in 2014. So things are looking good for the joint venture and the Chinese stock market in general this year..

Got it, maybe last one for me and I can appreciate that as a tier one supplier you can talk about volumes but I am curious, I know there's been some talk of potentially the European launch being able to be shipped to Canada because I know people like Vetter [ph] and some other fleets there's a pretty high level of interest and there has been, people still using HPDI, I mean is there any updates there as we think about volumes next year and the potential that some of those European volumes could also go to Canada?.

I would tell you Eric, obviously for the people that have used our HPDI 1.0 they are some of our biggest advocates and we have as you mentioned Vetter, these guys have really truly appreciated the product that we introduced all the way back in 2008 and they I would say that if we can find a way to be able to successfully do that I would -- and we can have the right discussions with the OEM, I think that there is no reason to think so.

But as you know road regulations and those kinds of things have to be met in the different jurisdictions and at this point in time we are having conversations in Ottawa and other places in order to be able to understand what is possible.

But I would tell you that we are putting our efforts that way and if we can find and be able to support [indiscernible] our good long loyal customer base. We'd love to be able to do that..

Okay, that's great. Thanks..

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

Good afternoon..

Good afternoon Rob. .

Hi, I know you can't talk about volumes with Volvo but sort of now that you got launched in the market, what sort of the company characterized customer interest and sort of marketing plans at this point?.

Rob I would tell you that I really need to turn you back to the OEM's to have that dialogue.

I think that there is obviously I will say excitements around the LNG truck and I think that with clean I will say environmental footprint and performance characteristics and that kind of thing, you probably can have a really good dialogue with all the OEMs in Europe in terms of what they're offering in terms of alternate fuel.

I think that HPDI happens to be a very superior solution because of the fact that you get such good performance from it and a very uncompromised diesel drive. And as more people get behind the wheel and see this I think it is just confirming for what we knew during the test cycle.

But I would really encourage from the OEM perspective that you perhaps check with the various OEMs specifically in the European market..

Okay, that's good. Thank you.

On the -- on your automotive business, effects helped a little bit but I think it was a pretty strong growth rate at even exit, do you have a kind of a constant currency growth rate and then maybe smaller color on what's driving that, is it oil prices going up or are there other market dynamic out there?.

I'll start it and I will hand it over to Andrea a little bit, but I would say that we are enforcing a combination of things happened. Obviously as we look at the product offerings and even a significant I will say interest on a variety of different people to offer natural gas vehicles in their part of their vehicle portfolios that's driving it.

But I would tell you that in general I think that our brands are the go to brands and we're getting great reception in terms of the products that we have as well as the kind of service our distribution network gives us in the independent aftermarket. So the combination of the OEM side as well as the aftermarket side is really driving it.

And Andrea you might want to add further color to that..

Yes Nancy, thank you Rob for the question. As Nancy was mentioning it is a combination of factors and our aftermarket channel we see that it is an interesting growth in some graphical areas, in particular in Eastern Europe and Turkey as Ashoka was mentioning.

Also in South America, Argentina which was where we suffered a huge downturn at the beginning of the year is now let's say showing signs of recovery. On the OEM side, we see strong interest in the lets say CNG and also in LPG completing the product portfolio for alternative fuels in particular from I would say European OEMs and also Indian OEMs.

So it is a combination of factors, some brand as Nancy was mentioning are performing really well and are giving us really good results. You see them on the top line as you can imagine..

Okay, thank you and my last question is on CWI, had a very good earnings contribution this quarter, what sort of is your sense on sustainability of that at this point and then maybe some color around the significant kind of decline you are expecting, some of the spending there?.

So, Ashoka do you mind helping Rob on that. .

Yeah, let me take that for Rob. Yeah, no doubt a very strong quarter but like I mentioned we had a very significant impact on our count of warranty accrual adjustment.

Now all that is absolutely good news because it goes to prove that all the costs that we had incurred in past years and all the efforts that we have put into product durability and reliability are paying off. Having said that I must caution you that a 37% gross margin is not something that I would recommend you model the out years on.

More reasonable number would be where we were historically at the gross margin level. On the spend we have had significant spend this year and last year related to OBD compliance work that needed to be done to make our trucks, to make our engines compliant from January 1, 2018. That is significantly behind us.

And just as importantly as you know I've been working on these zero equivalent engines, the 8.9 and the 12 liter in particular.

Most of the spend related to those engines are also behind us and the 6.7 liter engine has been launched earlier this year so that I expect will contribute to a very significant decline in both our R&D and our sales and marketing expenses going forward..

Thank you, I will turn it over..

Our next question comes from Colin Rusch of Oppenheimer and Company. Please go ahead. .

Thanks so much guys.

Maybe I missed it here in some of the dialogue but I'm curious why you're not raising the floor on your guidance here for the automotive segment given kind of what the implication is of the range?.

Well, I would say Colin thanks for the question. From our perspective when we gave the guidance we knew it was quite broad. We believe that as we move into the fourth quarter that we can see from the run rates that we're at the point that we believe will be to the high-end of it. We didn't feel that it was really necessary to change the floor on it.

We felt that at this point in time that we were going to hold with the guidance we gave and the range that we gave initially in the year or so. But I appreciate your opinion on it..

Fair enough, I may have some follow-ups on that coming offline.

And then just from a working capital management perspective, it looks like there's still some meaningful opportunities to mind the balance sheet for some cash, can you talk a little bit about your articulation on that as you go through the balance of this year and to the first part of 2018?.

Well, I will kick it off and then hand it to Ashoka. Ashoka certainly has lots of thoughts on this as he leads us through many of the balance sheet. I would tell you that as you know we started calendar -- this calendar year out indicating that we were going to do a full assessment of the portfolio.

We have done that, we have taken lots of different actions on the portfolio. I think that we are not, how do I say it, we continue to look for opportunities relative to our businesses and how they fit and what the market dynamics are. And we will continue to evaluate each business based on opportunities and those kinds of things.

So with that we'll continue to look but I think that one of the things that we've tried to do on the balance sheet as we have moved through the year obviously is just really trying to make sure that we are getting the value out of the assets we have and we are well positioned in terms of getting our spending down in order to keep our cash balances at relatively higher than what we have over the past years..

Yeah, I would absolutely second everything Nancy just said. Yeah, we continue to work through our working capital structure across the organization. Obviously -- with the HPDI 2.0 launch just having occurred we are working through and managing through the working capital implications of that business which we have not had in the past.

But we continue to work and institute pretty rigorous working capital management procedures and policies across the board particularly in Europe. And while we're doing that we continue to scan our portfolio for opportunities for additional non-core asset sales should that opportunity arise as well..

Okay, thanks so much guys..

[Operator Instructions]. Our next question comes from Jeffrey Osborne of Cowen and Company. Please go ahead..

Hey, good afternoon guys.

Most of my questions have been answered but maybe Ashoka, just wondering as it relates to maybe following up on Colin's question, I think you had referenced the Algeria contract potentially slipping into next year as well as some FX headwinds, is there a way you could quantify those as it relates to the automotive segment?.

Sure, I think they've gone on record as saying that that order is in the range of $6 million to $8 million U.S., a significant order for that country. And most of which is going to be fulfilled in 2018 which also accounts for the caution we have in the fourth quarter in terms of timing of revenue recognition..

Got it, and then this early in the quarter is there any -- you don't give a lot of granularity about all of the different end markets that you serve relative to the disclosure that Fuel Systems used to give as a public company but can you just touch on what your anticipated FX headwinds are, at least thus far is there anything out of the norm that would be noticeable for the fourth quarter?.

No, nothing out of the norm. We are watching exchange volatility. As I mentioned most of our European business is Euro denominated and….

It is naturally hedged. .

Yeah, and naturally hedged because most of our input costs are Euro denominated as well. But nevertheless it does have an impact on our revenue numbers. Outside of some massive geopolitical shakeup or some macroeconomic factors I think we have a fair amount of transparency into what the upcoming quarters look like and we are reasonably optimistic..

Makes sense and just had two more, one -- another one for you Ashoka and then maybe one for Nancy.

It is just on the R&D side, can you just talk about the cadence for next year, there is obviously a lot of drivers to drop the R&D spend as HPDI 2.0 ramps up, but should we think about like Q1 like a massive drop and then kind of flat lined at a 50% reduction for the year making that math work or is it a gradual sliding down of R&D to have the total net number in 2018 being at a 50% drop, just trying to get a sense of what that slope is?.

Yeah, it is more biased towards the latter Colin as you can expect -- I am sorry Jeff. As you can expect we're in the middle of this launch and fulfilling the orders from our automotive OEM. That will play out this quarter and next and the products were available for sale at least the auto books will open early part of next year.

So it is going to be a little gradual but a clear bias towards a downward trajectory..

And despite that you still feel comfortable with the first half EBITDA positive status even though the R&D drop will be mainly in the second half?.

That continues to be our target Jeff and we are working towards that. .

And then last one just for Nancy is, you've got a high profile electric truck being announced later this week and you've seen some inroads in the fuel cell industry as well.

So certainly a lot of excitement and buzz around carbon reduction strategies for the trucking industry, but do you have any high level views of how natural gas compares to those other two solutions on a cost per mile basis or the pros and cons as you're out there discussing the merits of an LNG based or CNG based fueling infrastructure system versus electric and fuel cell?.

Jeffrey, I am probably not the most qualified to talk through it on a per mile basis. But I will tell you the one thing that we have been -- why we're seeing the interests we are in natural gas is that we're ready now. So we don't need to go through the concept of proof like some of the other technologies need to.

I would say in general at this point in time the cost that we are able to do for HPDI and offer even on some other technologies whether it's on the light duty side or heavy duty side we're within -- most cases we are 24 months or less in terms of the payback.

It is my understanding when you start getting into fuel cells and electric and on a per kilowatt hour, the cost of those systems especially when you're getting into I will say heavy transport environment the cost of those are quite expensive.

So I'm just not in a position I can give you a direct comparison but I would suspect based on what I do know that our natural gas solutions are quite I will say economic. We see this I would say that even in the discussions as we've talked to transit companies whether L.A.

Metro or those kinds of folks as they are looking for their fleets we also hear that they think natural gas is a cost effective solution for them both in fueling as well as in the base cost of the bus and those kinds of thing.

But I would encourage you to perhaps reach out to some of those folks that are currently running both electric and natural gas and get their view..

Got it, no we have done that.

I mean certainly LA has made a big investment in their own refueling infrastructure but some of the more recent municipal bus RFPs have actually gone electric, so I am just curious?.

I think everybody is trying but we have -- CWI as I understand got a very sizable order as well recently relative to some transit and some what I will say were their rebuilding dimensions etc. So I think that there is -- I think at this point in time a variety of different solutions as I mentioned.

We just happened to think that natural gas I more ready now both in terms of the technology as well as the price. .

Makes sense, appreciate your insights. Thank you..

There are no more questions at this time. I'd like to turn the conference back over to Ms. Caroline Sawamoto for any closing remarks..

Thank you to everyone for joining us today. If you have any follow-up questions feel free to reach out to the Westport investor team. Thanks again for your interest in Westport Fuel Systems. Have a good day..

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