Westport Fuel Systems Inc (WPRT) 2016 Q1 法說會逐字稿

Welcome to the Westport Innovations 2016 Q1 financial results conference call.

As a reminder, all participants are in a listen-only mode and the conference is being recorded.

(Operator Instructions)

At this time I'd like to turn the conference over to Ryder McRitchie, VP Investor relations. Please go ahead.

Thank you, Brock. And good afternoon, everyone. Welcome to our first-quarter 2016 conference call. It is being held to coincide with the disclosure of our financial results earlier this afternoon. For those of you have not seen the release and financial statements yet, they can be found on Westport's website at www.westport.com.

By way of brief introduction, I joined Westport earlier this month and look forward to being a part of this team and building on their significant accomplishments over the past 20 years. I'm also looking forward to speaking with many of you over the coming weeks and months. Please feel free to give me call or send me an email if you'd like to discuss your interest in the Company.

On today's call, speaking on behalf of the Company will be Westport's Chief Executive Officer David Demers, Westport's Chief Financial Officer Ashoka Achuthan, and Nancy Gougarty, Westport's President and Chief Operating Officer. Attendance on this call is open to the public and to media, but questions will be restricted to the analyst community.

You are reminded that certain statements made on this conference call, and our responses to various questions, may constitute forward-looking statements within the meaning of US 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. And except as required by application securities laws, we do not have any intention or obligation to update forward-looking information after this conference call.

I will now turn the call over to David Demers.

Good afternoon, everyone. Thank you for your interest and support of Westport. 2016 is off to a good start. Through continued business cost reduction and resource realignment, Westport has moved our operating business to positive adjusted EBITDA despite the challenges in many markets. This achievement sets us up for strong, scalable and profitable growth, as oil prices rebound, and as environmental drivers create new demand for our products.

I want to touch briefly on four important developments during the quarter before turning the call over to Ashoka and Nancy for their detailed review. First, we announced an alliance with AVL late last year. AVL is the world's leading automotive engineering firm, and they partnered with Westport to develop global adoption of our HPDI 2.0 technology. This alliance is off to a fast start and reaction has been very positive.

Our core HPDI technology development program continues on budget and on schedule for release of our first production intent systems to OEM customers later this year. Our timing appears to be very good. As AVL has pointed out, AVL's powertrain engineering experience and testing solutions, combined with Westport's HPDI 2.0 technology, will create great opportunities for our customers.

We also completed the first of our non-core asset sales, and we are in the late stages of completing the sale of additional assets that we expect will add more than $20 million of cash to our balance sheet soon. During the quarter we announced a strategic investment program with Cartesian Capital, and we've closed two of those three announced tranches. The third tranche will close with the Fuel Systems merger. Cartesian have been creative and collaborative partners, and we welcome their support of our strategic plan.

And, finally, the impending merger with Fuel Systems, which we now expect to close in the first week of June, will dramatically improve our joint business portfolio and position us well for the future of OEM-driven opportunities around the world. Although we had hoped to close this transaction earlier in the year, we are confident there's widespread support for the merger from Fuel Systems' shareholders and their Board. And, as you have seen, the proxy advisory firms have formally supported the merger, as well.

The Fuel Systems shareholders meeting is on May 31, and shareholders do need to vote again, even if they registered to vote for the earlier meeting. As you know, Westport shareholders have already approved the merger. We look forward to continued development of our global business in 2016, and continued progress toward our vision of a transition from oil-based fuel, like diesel and gasoline, to clean, inexpensive natural gas.

Over to Nancy and Ashoka. I think Ashoka is up first, to take you through the numbers.

Thank you, David. Good afternoon, everyone. I will be providing you with some highlights of our first quarter, our path to profitability, and our cash position.

As David noted, despite continued weakness in the oil and gas sector, 2016 was a positive first quarter for Westport. We continued our progress on bringing to HPDI technology to market, and decreased our cash usage, reporting a 25% reduction in cash used from operating activities, excluding changes in working capital plus dividends from joint ventures, compared to Q4 of 2015. Revenue for the quarter ended March 31, 2016 was $24 million compared with $28 million for the same period last year. The decrease in revenue for the first quarter of this year was primarily related to the reduced demand of our light-duty after-market products, given the low oil price environment we are all faced with.

Our HPDI 2.0 program is on schedule and on budget for commercial release to our OEM customers. The development program is well into the testing and validation phase, with the focus being on engine and durability testing and the LNG fuel tank systems. Our investments in HPDI, as you know, are key to our future growth and success.

Westport successfully launched its new combustion technology in Volvo Car Corporation's new Drive-E Bi-Fuel engine in the first quarter of 2016 in Belgium and Luxembourg. The new Westport system is available on the Volvo V60 models and we have plans to further expand the product offerings into other European countries.

Our joint ventures, which we don't consolidate, are an important part of our business. Including our joint ventures, our total segments' revenue for the quarter ended March 31, 2016 was $118.9 million, a decrease of 24% from the same period last year, largely due to weakness at our Weichai Westport joint venture in China. The Chinese economy and the continued weakness in truck market there has obviously had its impact on our joint venture. Revenue for the quarter ended March 31, 2016 was $29.9 million on sales of 2,436 units, a decrease of 47% over Q1 2015. Our equity pickup from this joint venture for 2016 was $0.2 million, which is consistent with the same period last year, primarily due to aggressive operations expense management.

Cummins Westport, the revenue was $65 million on 1,647 units for the first quarter of 2016, a decrease of 11% over the same period last year, primarily due to lower domestic trucking and international volumes. However, our transit and refuse set markets continue to perform very strongly, particularly refuse where the overall market shift to natural gas continues unabated. The growth in renewable natural gas is also helping this trend.

Westport's portion of CWI net income for the first quarter this year was $1.8 million, a decrease of $69.5 million over the first quarter of last year. This was primarily due to the impact of lower revenue, increased R&D spending in the first quarter of this year, and favorable warranty adjustments in the first quarter of 2015.

Moving on to our cash position, as of March 31, 2016 our cash and short-term investments balance was $24.6 million. Cash used in operations, excluding changes in working capital plus dividends from our joint ventures, was $11 million in the first quarter of this year compared to $14.6 million for Q4 2015, a sequential improvement of 25%. The merger with Fuel Systems, which Nancy will comment on in more detail, along with the sales of our non-core assets and additional funding from Cartesian Capital, as David referred to, will further strengthen our balance sheet and liquidity position.

Moving on to adjusted EBITDA and our path to profitability, I'm delighted to report that our operations segment returned to adjusted EBITDA profitability for this quarter, compared with a loss of $1.4 million for the same period last year. This significant improvement of 102% is a result of operational improvement and cost management initiatives across all our businesses globally.

Consolidated adjusted EBITDA declined 15.2% in the first quarter of 2016 compared to the same period last year. Consolidated adjusted EBITDA for the first quarter was a loss of $10.6 million compared with a loss of $9.2 million in the first quarter of 2015.

This decrease was mainly due to weaker performance at our joint ventures compared to the same period last year. Excluding the joint ventures, however, adjusted EBITDA for the first quarter of this year would've been a loss of $12.6 million versus $15.5 million for the first quarter of last year, an improvement of $2.9 million.

We reduced our combined operating expense of by $0.9 million, or 3.8%, for this quarter compared to the same period last year, primarily due to effective management of our engineering investment programs and strict cost discipline across the board. As mentioned in the press release, we will provide 2016 guidance after the closing of the merger with Fuel Systems.

With that, I'll pass the call on to Nancy to discuss operational highlights.

Perfect, thank you, Ashoka. Good afternoon. As in the past, I'm going to provide some operational highlights and priorities for Westport and then discuss the upcoming merger with Fuel Systems.

Overall in the past five and a half weeks since we spoke to you last, Westport continues to move forward on our plans, with a sharp focus on moving new products toward full commercialization, improving our operational efficiency, refocusing and rationalizing our product offerings, and reducing our costs. The micro-economic and business headwinds in many of our end markets persist, but we see the results of our efforts, as evidenced by our positive adjusted EBITDA in Westport operations, despite the lower volumes in the period. We look forward to working with Fuel Systems, as we jointly drive for operational focus within the combined companies after the merger closes, hopefully in the first week of June.

As I turn towards our products and operations, let me start with HPDI 2.0. Our program continues and moves forward with multiple OEMs. In the first quarter of 2016, our product passed key durability and performance tests. And we are and will continue to deliver next-stage components that will be installed on engines for next phase of extended on-road performance testing with our OEM customers.

In parallel to the engine development efforts, the off-engine system is also progressing. Westport and Delphi are on track in completing and further developing production facilities to deliver the latest generation of HPDI fuel injectors. This facility will allow us to deliver high-performing components in commercial volumes at significantly lower cost. As mentioned earlier, our partnership with AVL is growing momentum, both in facilitating new HPDI customer discussions, as well as validating the benefits of our HPDI technology.

Now turning the attention to the joint ventures. CWI, Cummins Westport, following on Ashoka's comments, is looking forward to the launch and the sale of Cummins Westport ISB6.7 G engine and the Near Zero NOx ISG engine later this year. These engines will address a need in the existing market and we look forward to their success.

In terms of Weichai Westport, Weichai Westport experienced a sluggish Q1 due primarily to lower diesel prices and China market challenges. That said, our HPDI 2.0 program continues to move forward with engine development in activities for additional pilot trucks on the road later this year.

In terms of Westport operations, overall we are pleased with how our business operated given the lower volumes and the micro headwinds that we have had in the end markets. Our team has worked hard to manage the business, as well as seeing success in finding new markets for our products. Also, one of our OEMs is launching a new model with our components on it here in calendar year 2016. Across other product lines we remain focused on driving cost efficiency, aligning our cost to market volumes. We are pleased with shifting to an asset-light business model and believe we are very well-positioned to take advantage of the eventual market upturn.

As mentioned earlier, I want to comment on the upcoming merger with Fuel Systems. From an operational and planning perspective, we continue to have our task force and functional meetings work in areas including, but not limited to sales, distribution and marketing, manufacturing, product range and development, direct material and purchasing, legal structure, IT, finance and tax, as well as communication. We have used this extra time to our advantage and we are ready to hit the ground running from an operational standpoint.

We are looking forward to the opportunity to combine our systems and processes with the high quality of Fuel Systems assets. The merger will create a stronger company with greater scale, global reach. And we expect to reach the $30 million of total annual savings and merger synergies by 2018, not including one-time costs. So, from my point of view, the faster the integration the better.

With that, I will now pass the call back to the operator for questions.

(Operator Instructions)

Eric Stine Craig-Hallum

Hi, everyone. I just wanted to start with HPDI and the AVL agreement. Obviously trending well here early. But just maybe any thoughts on how the pipeline has developed since that agreement has been put in place.

And then when you think about HPDI going forward, do you think the value there is with new OEMs for HPDI 2.0, or further penetration with existing OEMs? Or how do you view that?

Hi, Eric. That was nice soft ball. How about we get the first customers and then we will talk about whether it's better to get more partners or more penetration.

To be serious, I think that what's happened over the last couple of years has been strong development on the engineering side, which is reducing cost because reliability and performance are just as important as first fit cost. And we've seen real breakthroughs in that front.

I think we've given people ideas about that, but I think customers are going to be very happy with the resulting product. Our first generation was basically hand built and hand assembled. This product is going to be coming out of the world's largest truck plants, with the benefit of several years of development, as well as lower cost.

Clearly we would like to see all of those new partners be delighted with their launch volumes and grow beyond. I think the feedback we've had as we started to look now at early customers and where it's going to get launched, we are quite excited about the demand. There's a lot of interest from customers, particularly in places that have strong greenhouse gas targets. This is going to be a very attractive product.

And I think that people are losing sight of the fact that there's still a great economic argument, particularly in places that have expensive diesel fuel. So, we are expecting a lot of interest out of this and we are seeing, as a result, pull through other OEMs.

So, expanding our current programs and getting strong customer demand after launch is priority one. Priority two, I think, is to exploit the growing demand from the rest of the industry to catch up and have a natural gas product. Because it looks like there's going to be considerable interest around the world, just as a result of our work with AVL and as a result of the change in regulatory focus, and the expectation that we are going to see higher oil prices going forward and continued cheap gas.

So, you've heard that story. I think we are just heads down. We're going to deliver the product on time, and I think our time is actually going to be pretty good.

Okay. Just wanted the current thoughts there. Maybe just turning to CWI, definitely hearing strong interest here in advance of the Near Zero 9-liter -- just thoughts on the 12-liter. People view that as being pretty important given that it's a larger part of the market, and hearing that, that's right now targeted to 2018 for launch. Any chance that, that gets moved up?

Eric, this is Ashoka. Yes, we are extremely excited about the Near Zero product. We have gone on record as saying that we will see the launch in the second half of the year. I think the receptiveness has been extremely positive.

I did mention we had a soft first quarter in terms of domestic truck volumes for CWI, but we think a part of that is also due to our potential customers holding off for the Near Zero product. So, all in all, very positive news there and the development and launch is on schedule.

Additionally, of course, you know we have the 6.7 liter, which we've deliveries to our first customers in this quarter. That is going to provide continued impetus in a market that we haven't addressed in the past.

Okay. And the 12-liter? I think a tentative launch date for that, for the Near Zero version, is out for 2018. Is there a chance that you can move that up, just given the potential demand there?

I'll jump in because I'm not on the Board so I can speculate. And Jim Arthurs is in the room, too. You might get Jim to speculate. I don't think we have announced a date for the 12 liter. There's speculation about it.

The reason we wanted to launch the 9 liter first is because we really think this is a bus and refuse product first. There's strong regulatory pressure on those segments, and they could take advantage of some of the urban credits and the urban operating incentives for fleets, in places like Los Angeles, where there is increasing pressure to start to do something about NOx emissions and smog again.

So, we thought the launch product should be the 9 liter, and I think that's probably the right one. Truck fleets probably have less opportunity both for, call it, NOx-related incentives as well as, I'd say, perhaps less concentrated NOx emissions because they are moving around so much outside of city cores.

But the technology is quite applicable to both of the other engine platforms. And I think the joint venture is going to be looking carefully at where the demand is coming, and then put that technology on as part of a product refresh. No need to do it today on the 6.7, but maybe in a couple of years, once the product is out, there would be time for that. 12-liter, I think, is ready to go and if it makes sense we would put that with a product refresh. Jim, do you want to comment further?

I would just say, on the 12 liter, yes, absolutely a critical product. There's a few things that go into the product line. When we have our next Board meeting we will be spending a lot of time on the 12-liter product.

You've got a Near Zero NOx opportunities. We've got onboard diagnostics that we have to have in place no later than the end of 2017, which is not a trivial thing. And then we've also got, after the engine's been in the marketplace for a few years, some opportunities to improve the product.

So, it's really a question of, do you do all of that at once and come out with one, or do we do some stage releases. And that's the sort of thing we are kicking around, but have not got anything that we will announce to the marketplace quite yet.

Okay, thanks for the color.

Rob Brown, Lake Street Capital Markets.

Good afternoon. On your HPDI 2.0, you said release the end of this year. Could you just outline the steps of what happens after that? How soon before those get put into production engines?

I'll defer to Jim here. We'll let him explain.

Okay. If you think about the process that we go through when you're talking about an OEM production process, right now where we are is the components, the injectors, the fuel tank systems. All HPDI components are fully design-stable where we know exactly what the production parts are looking like. We're in the middle of doing performance and durability testing and reliability testing.

The big one, when you're talking about heavy-duty trucks where they have a 2 million kilometer life span, is durability testing. There's no substitute for testing over a long period of time with trucks on the road. So, we are in the middle of doing all that.

We are also now in the beginnings of getting the high volume manufacturing in place. So, we've got equipment on order that'll be going into the Delphi plant. And there's a fair bit of work to do to get that equipment installed and validate that we can make the production parts exactly the same every time, meeting all the specs.

And then from the OEMs' perspective, when they get our parts, that are now proven and durable and the right design, they go through their own durability testing, as well as their own manufacturing set-up process. So, later this year we're really starting that, where they've got the components and they will go through their work, which takes a little. So they are able to manufacture, now for the first time, an HPDI product that comes off of the assembly line at an OEM engine plant and an OEM truck plant.

Okay, good. And then I know you're not going to probably say the specific timelines but what's a typical timeline from the part completion to have a product in the market?

I think we've said we have trucks that are going to be in customer hands -- early customer hands -- in early 2017, depending on which market we are in. Now, Jim's being generic.

I can tell you that the protocol varies from OEM to OEM. And certainly there's different sensitivities around how much testing, and do you release it in a handful of customers or do you go to 100 customers. Everyone has their own different protocol which, of course, we're not really trying to influence.

We want to get the parts to a consistent level that we are happy with, then we will release those to the OEM, and the OEM will release the product on their schedule. I think we're looking forward to seeing genuine customer -- real commercial sales over the next 12 to 18 months, I'd say, through all our OEMs.

Okay, great. An then I think you said the 6.7-liter started to ship. Could you give us a sense of the ramp there and the market opportunity you're going after in terms of size of units?

Sure. The 6.7 is targeted to a couple of segments -- school buses and, call them, straight trucks, urban delivery trucks. To put it in perspective, the transit bus market that we have been in has been our first core market, runs about 5,000 to 6,000 transit buses produced every year. And we've got about a one-third share of that business -- has come to us to put engines in them. The garbage truck business, which started a little bit later than buses, is also around 5,000 units a year, and more than half of those today are produced with the Cummins Westport engine.

Now, when you move to school buses, the Type C school bus, which is the common one, that's about a 30,000 unit per year market. So, it's three times the size of transit buses and refuse combined. And then straight trucks is more like a 60,000 or more unit market.

So, these two markets are significantly larger than our traditional bus and refuse market. Not as big as 240,000 a year Class A heavy-duty, but both really nice-sized markets. And we think we have a good economic package, and so on, for those customers.

Okay, thank you for the great overview.

Jeff Osborne, Cowen.

Good afternoon, guys. I just had two questions. Ashoka, I was wondering, could you just touch on the warranty adjustments that you mentioned? Could you quantify that and describe what the nature of it was for?

And then, also, I was wondering on the Cartesian financing arrangement, if the Fuel Systems deal does not go through, for whatever reason, is there any penalties or payments or reversals of any of the first two tranches that have been set up?

Let me take your first question first. The warranty reversal had to do with the 8.9 liter engine. There was a significant royalty accrual in the first quarter of 2015, which explains a large part of the drop in income between 2015 and 2016. So, that's the point I was making on the warranty accrual. It related to the 8.9 liter engine.

Got it. I just wanted to make sure it wasn't affiliated with the 12 liter. Thanks.

No, it was the 8.9, and it was a reversal in the first quarter of last year. On Cartesian, yes, you're right, the third tranche is planned to close with the Fuel Systems merger. However, the first and the second tranches are completely independent and they are not impacted by any [written charter] related to the merger.

Got it. Last question, I probably could look this up in the MD&A, but do you have any lines of credit that are untapped or any other liquidity sources in the event that it doesn't go through?

We have some in Europe, as we have disclosed in our MD&A. And we have certain other sources that we are actively working on right now that will provide a meaningful amount of liquidity, yes.

Got it. Appreciate it. Thanks much.

(Operator Instructions)

Pavel Molchanov, Raymond James.

Thanks for taking the question, guys. I wanted to compare and contrast CWI versus WWI, specifically on operating expenses. In WWI you've successfully cut a lot of costs, keeping operating income reasonably good. In CWI, though, they've actually went up, even as sales dropped What explains the difference there?

There is a lot going on in CWI. As Jim mentioned, we have a significant amount of development expenses related to the launch of the Near Zero product, which is expected in the latter half of this year. And Jim also mentioned the OBD, or the onboard diagnostics, requirements that all engines are required to meet for being able to be sold in 2018 and beyond. And there is a significant amount of engineering costs related to that program, as well.

Got it. Then a policy question. 2016 is the first year in a while that the fuel excise tax credit is actually in place at the start of the year rather than changed retroactively. And I was wondering whether you're noticing any uplift in the order flow or even just customer inquiries based on that continuity versus what it was, let's say, 12 months ago.

Hi, Pavel. It's Jim. I would say that, if you look at our current natural gas customer that comes to Westport North America, they're pleased as can be because their business cases for trucks they bought earlier are working out well. And in the markets like transit and refuse that are well entrenched, this is definitely continuing those markets on growth paths.

I'd say in the commercial truck side, where realistically in the last little while, diesel fuel has been right down on top of natural gas prices, if you just look at posted prices. The excise tax is nice but it is not enough to swing the bar for those customers for whom the economics is the sole determinant of what truck they buy. So, we've got lots of customers that have been buying gas trucks; they continue to. But for someone who's going to do it new right now, they're pausing a little bit, and that tax isn't enough to swing them over. We do need higher --.

Certainty, certainly helps, let's say, but it's not sufficient to make a business case on its own nor has it ever been sufficient. I think everyone is expecting oil prices to continue to creep up, so these business cases are getting better and better.

The certainty of the excise tax is helping us, in the sense that a lot of the fuel providers are now able to have more certainty on fuel price quoting, as well. So, I'd say it's all good but it is not some light switch effect where it suddenly created a huge demand.

Generally, I'd say economic conditions have been the dominant force. The continued weakness in the resource sector, in the oil and gas sector, has really impacted everybody. That overhang continues to be a damper for demand. And again, once things get a little healthier, we expect there to be a big rebound in interest in natural gas vehicles.

Different around the world. I will just jump in because we do see -- we're quite North American-centric here. Conditions are quite different around the world. And I think what you're seeing in our operating units, and Nancy can jump in and verify this, is new markets are appearing.

As local infrastructure starts to get built, there are suddenly real improvements in opportunity and the team is jumping on it, which is partly why we've, I think, done reasonably well in the face of pretty substantial change in the market around the world, with government incentives disappearing in lots of very traditional markets that have traditionally been very strong. We've been able to jump in new markets as they appear.

And I think generally, around the world conditions look bright over the next five years. And that's really what we're trying to do, is position for where it makes economic sense, as well as position for the environmental regulations where the OEMs are responding.

Appreciate it.

John Quealy, Canaccord Genuity.

Hi, good afternoon, folks. On the light-duty aftermarket business, one of your competitors, Landy, had comments that I'll paraphrase as, subdued but stable, in Europe. Can you comment on the underlying demand there, especially given the pending merger with Fuel Systems that is more concentrated in that business line in that part of the world than you currently are?

I'll let Nancy jump in.

Okay, not a problem. I would indicate that our business is really broken into two different aspects. One is an OEM business and one is an aftermarket business. So, I think our business is a bit more concentrated than Landy in the OEM business.

And I would say that, what we're finding and seeing is that the OEM business, that people are trending, more OEM manufacturers are offering a, I'll say, either a bi-fuel or alternative fuel vehicles. So, we are quite pleased where the OEM side goes.

I would say in the European market, relative to where we are in the independent aftermarket -- and I'm not in a position to comment relative to Fuel Systems -- our business is holding up on that front. Now, some of what I would say is the higher tech products and some of the products that we have that have, I'll say, high-performance features, we are finding those are moving quite nicely.

We do see within the European market different circumstances for different countries. So, I don't think we can paint Europe with one brush. I think that the good news for us is with our direct sales force, as well as our distributors, we are able to get the best out of each of the markets that we participate in, in Europe.

Okay, thank you for that. As a follow-up, perhaps for Ashoka, cash or expenses life to date on the pending Fuel Systems merger, can you comment how much money you've spent so far trying to close the deal?

We have a reconciliation between net income and adjusted EBITDA. I think the number for the first quarter of this year was $2 million. It's identified as one of the items that is -- in addition to that, we had approximately $4 million of costs last year.

Okay, thanks. I'll take a look at that. Thank you, folks.

There are no further questions at this time. I would like to turn the conference back over to Ryder McRitchie for any closing remarks.

Thanks, everybody, for joining us today. And, as I said earlier, please feel free to reach out to our IR team if you have any follow-up questions. And we will look forward to working with you in the future here. Other than that, our call is now complete.

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