Thank you for standing by. This is the conference operator. Welcome to the Westport Fuel Systems First Quarter 2018 Financial Results 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.
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 morning. Welcome to Westport Fuel Systems' Q1 2018 conference call, which is being held to coincide The press release containing Westport Fuel Systems' financial results that went out last night. On today's call, speaking on behalf of Westport Fuel Systems Chief Executive Officer, Nancy Gougarty and Chief Financial Officer, Ashoka Ashutane. Attendance at this call 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'll now turn the call over to Nancy.
Perfect. Thank you, Carolyn. Good morning, Thank you for joining us at Westport Fuel Systems First Quarter Results Conference Call. We continue to see a rapid Transition in the transportation industries towards environmentally friendly fuels and technology. Traditional fuels Are decreasing in the market, especially diesel.
In the Q1 of 2018, The European Union diesel car registration fell 17% compared to the same period last year, While the market for natural gas, propane and ethanol had a 12% increase year over year. This only means that there is a tremendous opportunity in front of us. Consumers demand clean vehicles And there's a greater urgency for market ready solutions. We still need to stay focused On deploying alternative fuel solutions for transportation vehicles, one way is to continue to review our portfolio And look to divest non core businesses. However, today, I'm going to focus on the core business.
If you would please turn to Slide 2. Westport Fuel Systems has a complete product offering that addresses a broad range of alternative fuels including Propane, natural gas and estrogen. We have LPG and CNG kits for the Aftermarket conversion and we have 25% of the global market share. Our kits include a complete range of products including our most advanced For the aftermarket business, Westport Fuel Systems continues to invest in targeted R and D To stay paced with new technologies introduced by transportation OEMs and their engineering evolutions. We have 0 kilometer conversions or delayed OEM solutions for LPG and CNG conversions.
This is a great solution for our OEM partners to provide alternative fuel vehicles in their showroom. In some countries like Italy, Turkey and Sweden, Westport Fuel Systems has a dominant market share. If we look at the OEM light duty solutions, LPG and CNG components and complete systems are available. And again, Westport Fuel Systems has a leadership position in the supply of CNG off engine components such as Tank and Phil Val for the light duty market. On the medium duty transportation solutions side For OEM, including CNG Components and Complete Systems with a strong presence in India and Eastern Europe.
As I had mentioned before, last year alone, more than 20,000 natural gas engines in India At Westport Fuel Systems, ECUs, Engine Management Systems, regulators and more than half of the vehicles are using our injector solutions. Westport's HPDI 2.0, our fully integrated solution For heavy duty long haul customers is launched. Our no compromise technology is providing a positive environmental impact And performance efficiencies, which our customers need. The industry sources have reported that LNG Trucks could take up to 10% of the European truck market in the near term and 20% using LNG by 2,030. In addition, our joint ventures Cummins Westport and Weichai Westport who produce natural gas engines Dominate their respective local markets in North America and China.
As for our hydrogen product line, Westport Fuel Systems is able to offer a very competitively priced hydrogen components. Our OEM focused development and validation process are also used for hydrogen components, making them a robust solution today for fuel cell applications. Westport Fuel Systems is poised now to serve the market needs for clean energy products. And the good news is that all the alternative Fuel solutions that we have are able to be used with renewable fuel sources. For example, Clean Energy's renewable natural gas called Redeem or HVO, a diesel equivalent made from Vegetable oil that is chemically identical to fossil diesel.
When renewable fuels are paired with near zero engines Like the Cummins 12 liter engine, the result is an emissions level that is equivalent to battery electric vehicles. With government incentives and innovative leasing programs such as the one that Clean Energy and Total announced yesterday, We expect an increase in the adoption of Cummins Westport 12 liter engine in North America. Now that you've heard about our diverse product portfolio, I'm going to conclude with our key priorities of the year. These priorities are built squarely around our customers and their needs. They are simply focused on broadening our product offering, Deploying market ready solutions, managing cash and increased engagement with key OEMs and industry partners.
We are continuing to have active discussions with our Chinese joint venture partner and OEMs on HPDI. These discussions are progressing and moving in a positive direction. But as I have said before, we need the right attributes Until we have negotiated the right agreement for the company and our shareholders. And when we get it done, we will then announce it. With that, I will turn the call over to Ashoka to provide our Q1 financial details.
Thank you, Nancy. I'll begin with Slide 3, which provides a summary of our Q1 2018 performance. On a consolidated basis, we ended the quarter with $67,600,000 in revenues and an adjusted EBITDA loss of 3,500,000 Our gross margin for the quarter was impacted by costs related to the HPDI 2.0 product and significantly lower engineering service revenues Compared to what we had both in the 1st and the 4th quarters of 2017. As expected, our operating expenses continue to decline, Primarily on account of lower R and D expenses for the HPDI 2.0 program. We are well on track to achieve Positive consolidated adjusted EBITDA during the Q2 of 2018 as stated in our last earnings call.
Please note that we have now realigned our reporting segments into Transportation, CWI and Corporate. Turning to slide 4, which shows our Transportation segment. Revenues for the quarter improved by $7,600,000 compared to the same period Last year, this was on account of the relative strength of the euro versus the U. S. Dollar, sales of our HPDI 2.0 product And stronger European independent aftermarket and DOEM or delayed OEM demand offset by lower engineering service revenues.
As stated earlier, gross margins were impacted by costs related to our HPDI 2.0 product and lower engineering service revenue this quarter. As expected, however, we have a significant drop in our R and D expenses, as much as 25% over the Q1 of 2017 And 24% sequentially. Our SG and A costs trended lower as well. Our adjusted EBITDA for the quarter was a loss of 0 point $6,000,000 a significant improvement over a loss of $2,400,000 in the Q1 of 2017 And a loss of $4,000,000 in the Q4 of 2017. Turning to Slide 5, which shows revenues were lower on account of significant pre buy activity that we saw in the Q4 of 2017, Ahead of January 1, 2018, OBD or onboard diagnostic compliance requirements and vehicle readiness activities at the OEM level.
Gross margins were lower on account of the lower revenue as well as a negative warranty adjustment this quarter behind us. We are beginning to see a sharp reduction in R and D expenses by as much as 44% this quarter. SG and A costs are tracking lower as well. We closed the quarter with net income of $3,000,000 versus $3,500,000 in the Q1 of Note that the R and D costs we show here are related to costs associated with protecting our intellectual property, Including maintaining our patent and trademark portfolios. We had an increase in SG and A costs for the quarter as compared to the prior period quarter On account of legal fees, offset by a decline in stock based compensation costs.
Turning to Slide 7, Which shows our cash walk. Starting with the beginning balance of $71,800,000 we had a net use of cash from operations and working capital Of $9,500,000 mainly on account of working capital requirements for the HPDI 2.0 product And performance bonus and legal fee payments in the quarter. We had cash restructuring expenses of $2,900,000 Primarily related to the exit of certain lease commitments and capital expenditures of 3,600,000 With the HPDI capital expenditures largely behind us, we expect that current year capital expenses will be less than half of that in 2017. We had a release of the holdback related to the sale of our industrial business last year of $3,600,000 And debt and interest payments of $4,200,000 And we ended the quarter with a cash balance of $55,200,000 We expect to achieve full year 2018 revenue from continuing operations to be between $255,000,000 275,000,000 As stated earlier, we also expect to achieve consolidated positive adjusted EBITDA during the Q2 of this year. With that, I would like to turn it over to the operator for questions.
Thank you. We will now begin the question and answer session. Our first question comes from Eric Stine of Craig Hallum Capital Group.
Good morning, Nancy. Hi, Silke.
Hi, Eric.
So let me start with just a 2 part question on HPDI. Now that Launched, you've got trucks on the road in Europe. Just curious how the OEM pipeline has come together or has changed as a result of that? And then when you look at what those OEMs are looking for, I mean, any clarity you can give on whether those Skewed more towards a similar engine to what is now in the market, or are they looking for more of a unique solution And just what that would mean in terms of time to market or development?
Well, let me try to answer the first part first. And that in terms of the reception of the product in Europe, I think that it has been quite good. We're very pleased. As you know, as any time you're launching a new product with new technology, we've got to make sure that the entire System is ready and up and running. And so, I think that all of those attributes are getting in place.
And You're starting to see country by country, more and more vehicles on the road and that will continue throughout the calendar year 2018. In terms of the second part of your question, Erin, in terms of what are people looking for, I would say there's Different customers that have different approaches to the market. Some people are very comfortable with Me Too products, which means that it would be minor And in some cases, maybe even, I'll say some delayed OEM Modifications and others are looking for differentiating products and technologies. Obviously, those would take us longer to get to market.
Yes. I mean, is it fair to say that now that it's 2.0, part of that is with the goal You can get the market quicker. If it is more of that as you put it me too version that it's 18 to 24 months kind of timeframe? Okay. Okay, good.
Maybe just turning away from HPI a little bit, I mean, I know that gets a great deal of the focus as it should. But just curious about the your high efficiency spark programs there as well. Just curious Where that stands? How you'd characterize the interest levels? And is that something where you'd And I know you're not in charge of this, it's the OEM, but there's potentially some news flow on that front in 2018.
Well, I would say that again, what we're finding, whether regardless of whether it's in the trucking side or in the automotive Market ready solutions or things that can go fast to market. I think that a lot of OEMs are finding that they don't have a full Portfolio in certain markets, whether it's cars or trucks. And that the Spark Ignited product, It does great in the medium duty space and I think that that's where we're going to see most interest. But what I would say is What we're finding now is the fact that we can move to market so rapidly. And as I mentioned in my speech and as Shokan mentioned in his speech also the upswing that we've And I think that with the enhanced Spark Ignited, that's going to be one of those products that can come to market In a more rapid fashion.
Yes. Okay, that's great. Maybe just last one for Ashoka, Just in terms of CWI, I know you had the warranty adjustment there, which impacted margins. I mean is that something that we should kind of view one time in nature or is that something that you'll have that for a little bit now that you've launched The 12 liter near 0?
Yes. Eric, I don't want to make too big a deal about that warranty adjustment. Bear in We had significantly lower revenues this quarter than we had in the Q4 of 2017 or for that matter any quarter last year. So there was an impact there as well. But yes, we did have a warranty adjustment.
No reason to believe that that's going to be an ongoing issue And that did impact our margin slightly. But net net, as I mentioned, if it weren't for those adjustments, our quarter gross margins for our current quarter would Actually been higher than the corresponding gross margin in the prior period quarter.
Yes. Okay. Thanks a lot.
Yes. Our next question comes from Rob Brown of Lake Street Capital Markets.
Good morning, Rob.
Sticking on CWI for a second, Maybe could you give us some color on the cadence of the unit shipments as the year goes on after the kind of pull forward last quarter? How does that recover throughout the year?
No, I think we are beginning to see recovery already, Rob, and the pull forward last year was Essentially on two grounds. 1, the fact that we had fleet owners who wanted to pre buy before the OBD compliance requirements kicked in And also because there's a fair amount of vehicle integration work that needs to be done once you have these OBD compliant engines installed in your truck. So there was some, Xiaominguez, that's what I meant when I said vehicle readiness issues in the Q1. That is largely behind us and what we Seeing now is a very strong recovery or a pickup in volumes. So we are reasonably confident that We are looking towards a strong year in 2018 at CWI.
Okay, great. And then what's your view on the demand growth that can come from the new lease program that Clean Energy discussed yesterday?
Absolutely. Of course, we are not counting on too much on that front this year, because we would expect that it would be 3rd early Q4 by the time the mechanics of the lease program are in place, but we are extremely encouraged by the developments at Clean Energy, Investments by Total and more importantly the financing, the $100,000,000 financing program that they plan to put in place. So we expect to see that The effect of that more in real late 2018 2019, but and beyond. But irrespective of that, with the extremely strong product offerings that the company has, near zero options on 6.7, 8.9 and 12 liter And all OBD compliant, we would have seen a significant uptick in we would expect it to see a significant uptick in volume growth anyway.
Okay, good. And then on your automotive business, You mentioned some good growth in the European market, but how was your sort of core automotive business growth? Was it sort of similar to the market? Just some comments on how the automotive growth for your business is doing?
We're seeing strong growth in particularly Aftermarket and the DOEM or the 0 kilometer conversion parts very strong in Europe matter of fact. We've said in the past that we expect to see lowtomidsingledigitgrowth in this business. We have clearly outdone that. And our presence in the market is clearly playing its part in helping us grow there.
Let me just answer that. I think what we're seeing is an independent aftermarket just as Ashok has said, but what I think that the other news is, Rob, is that we're More content per vehicle as well as the desire for them to have a portfolio that is more Broad than just petrol and diesel is also helping us on the OEM side as well.
Great. Thank you. I'll turn it over.
Our next question comes from Jeff Osborne of Cowen and Company.
Hey, good morning. A couple of questions on my end. Ashok, the parts revenue on CWI was pretty high. Was that is this a new run rate or was there some one
I wouldn't say there was any one time items. I mean, bear in mind, the engine population increases as we sell more into the market and as they come out of warranty, it is extremely favorable. So we expect to see continued growth in the parts revenue in this business.
Got it. And then shifting gears to the 2.0 program, is there any sense of perspective you can offer in terms of Which markets your partner is having the most success in, where the bulk of the infrastructure has come online and people can move forward with?
You want to take that, Nancy?
Let me see if I can get it started. I think at this point in time, it's still early days. And where I think that we are starting to see some good pickups is for sure in the UK and what I would say In areas where they have LNG as a really known fuel commodity, We're also seeing it in countries where there is relatively high incentives, which are Italy as well as in the Nordic countries.
Got it. And then the last question I had is just the feedback from the Act Show is there's certainly a lot of pent up interest in the 12 liter near 0, but it sounded like Some of the OEMs haven't qualified the engine. Can you just give us a sense of where we're at in terms of partners of Cummins that qualified that and how we should think about the revenue ramp for that? I think Ram, for that, I think Eric had asked about that before, but safe to assume it's more of a back end loaded year?
No, I wouldn't necessarily call it a back end loaded year, Jeff. I think it will be We are seeing a pickup already as I mentioned. So we will see more or less shall we say linear growth is not unreasonable to expect.
Thank you. Our next question comes from Colin Rusch of Oppenheimer.
Thanks so much guys. Obviously, you're approaching this EBITDA breakeven very quickly. Can you talk a little bit about What's going to change in the financial statements to get you there? Is there an incremental margin increase here? Are you just looking at a bit of revenue Growth or are there some meaningful savings all of the above, but if you just get into the granular detail on that that'd be great.
Absolutely, Talan. I mean, simplistically, I could say all of the above, but frankly, it is a 3 pronged approach. I mean, as you've noticed, our Former Automotive segment continues to perform strongly, particularly in the IAM and the DOEM side. We are seeing strong growth there on the top line, Stable to positive growth in the margins as well as a result of all the integration and measures we put in place since the merger in 2016. So that is clearly a strong contributor.
The second contributor is CWI, I mean, make no mistake, CWI is a very significant contributor to our bottom line. And you can see in our results that the strength of CWI goes in R and D expenses. We have said in the past that with the launch of HPDI 2.0, we expect the R and D program in what we then call the Corporate and Technology segment To come down by 50%. We are beginning to see that as well. So the net result of these 3, as we expected, is Getting us to where we think we need to be, which is starting out with consolidated adjusted EBITDA positive in the next quarter.
Great. And then just in Europe, as you see the new trucks roll out, could you talk about what you're seeing in terms of preparedness and The service infrastructure, the kind of breadth and density of the service infrastructure just from a country by country basis, how wide is it Are we going to need to see some real investment in that to really see adoption on the trucks?
Let me take Yes, I'll try to take that. And so I would tell you that at this point in time that our launch Have taken a significant, say, effort and hit pricing for a lot of people, Their organization instead of doing train the trainer and then moving it to each of the service networks independently, they have decided to do it by bringing in Multiple people from different locations. So we are of the belief that strategy will help get out Trade technicians in a much faster way and we'll be able to embed the technology and the capability as more trucks move actually out into,
This concludes the question and answer session. I would like to turn the conference back over to Caroline Sawamoto for any closing remarks.
Thank you everyone for joining us today. If you have any follow-up questions, feel free to reach out to the Westbourne Field Systems Investor Relations team. Thanks again and have a great day.
This concludes today's conference call.