Westport Fuel Systems Inc (WPRT) 2011 Q4 法說會逐字稿

Hello, this is the conference operator. Welcome to the Westport Innovations Inc fiscal 2011 Q4 and year-end financial results conference call and webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). At this time, I'd like to turn our conference over to Darren Seed, Vice President of Investor Relations and Communications. Please go ahead.

Thank you, and good morning, everyone. Welcome to our fourth-quarter and year-end conference call for fiscal 2011. It is being held to coincide with the disclosure of our financial results, earlier this morning. For those of you who haven't seen the release and financial statements yet, they can be found in Westport's website at www.Westport.com. Speaking on behalf of the Company will be Westport's Chief Executive Officer, David Demers, Westport's Chief Financial Officer, Bill Larkin. And President of Juniper Engines, Ian Scott. Attendance at this call is open to the public and the media, but for the sake of brevity, we are restricting questions to analysts and institutional investors.

You are reminded that certain statements made in this conference call and responses to various questions may constitute forward-looking statements within the meaning of US and applicable Canadian securities laws, 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.

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 applicable securities laws, we do not have any intention or obligation to update forward-looking information after this conference call. You are cautioned not to place any undue reliance on any forward looking statements. Now I will turn the call over to David Demers.

Thanks, Darren, and good morning, everyone. We've got a lot of things to talk about this morning, so I'm just going to dive right in. First off, yes, we've decided to make everyone's life a little bit easier and shift to a December 31 year-end. We begin to report our numbers for calendar 2011, and then forecast forward on a calendar year basis for the consolidated Company, as well as for our various subsidiaries and joint ventures. Today, of course, we are giving you the March 31 numbers, that also officially end our fiscal 2011 year, so forgive us if we're being repetitive as we give you calendar and fiscal perspectives going forward.

We've also announced a significant strategic acquisition in our Juniper business unit, with the signature of a share purchase agreement yesterday with the shareholders of Emer. We'll have Ian Scott, Juniper's President, on the call in a few minutes, to take you through this deal, and to answer your questions. Briefly, though, we think this is an important and very synergistic transaction, it will position Westport in the light-duty engine space with a unique portfolio of proven components, advanced technology, global relationships and unique capabilities. This market is developing quickly and we believe Emer will be an important building block alongside OMVL, which we acquired last July. It also significantly increases the scale of the combined Juniper business, combined revenues in 2010 for the three units, would be approaching CAD100 million. We expect the acquisition to be strongly accretive, and there are some obvious opportunities for synergy and growth, but I will let Ian take you through that.

Fiscal 2011 has seen a tremendous shift in the support of natural gas as a transportation fuel, and the resulting market transformation is underway. We've talked about this throughout the year, but the reason is very simple. Oil prices are rising again, they are returning to the levels last seen in 2008, just before the global economic crisis. On the other hand, over the last couple of years, the supply picture for natural gas has dramatically improved all over the world, and in particular, key oil importing countries, such as China and the United States, are discovering that they have significant domestic natural gas resources.

Production costs, even for these unconventional gas resources, remain very attractive, so the long-term price trends are encouraging, and although we talked about reaching tipping points in key markets, we have to remember this has really come after years of market development work, and significant financial investment by Westport. We're continuing to invest heavily in market development, because we believe the opportunities are compelling, the strategic value of becoming a leading player in each of these individual market opportunities is very high, and so that's why you see us continue to be aggressive about moving into a new space.

Westport's strategy, remember, is to set the industry-leading standard for alternative fuel products, over the entire global market for transportation products. At the same time, we want to broaden and strengthen our existing relationships and our market coverage. To that effect, the Westport team has been working with several prospective OEM partners to deliver market analysis, business plans, technology, proof of concept work for new products, and then of course, finally, to negotiate commercial alliance terms. In addition to our new locations with the OMVL acquisition this year, we've opened new offices recently in France, Australia, and Detroit, and we continue to grow our capabilities in China, Canada, India, and the United States.

Looking specifically at our financial results last year, revenue reached CAD148 million, which was up 21.7% from fiscal 2010's CAD121.7 million. On a calendar year basis, our revenue in 2010 was CAD144.4 million, up from CAD108.2 million in calendar 2009, or 33%. This continues our long-term 30% CAGR performance that we have talked about from fiscal 2008 to 2011, we've shown you almost exactly that growth rate. I think we are a little over 29%, just in case anybody's going to get me picky on that one. But 30% is a reasonable guideline going forward for the next few years, as we've said, we are comfortable with this, it's sustainable for the next few years, specifically, we expect calendar 2011 to come in at approximately 30% over 2010 on top line, not including the acquisition. If you take a look at the press release, I think we are looking for the Emer deal to add CAD31 million to CAD34 million over the next six months, to the Juniper top line, so that would take us well over that 30%. But the current businesses are growing hopefully, and we expect 2011 to be a strong growth year.

CWI continues to show very strong bottom line contribution and growth prospects are good this year, with the refuse market, transit and regional trucking market doing very well, and new products on the horizon. We invested heavily in launching heavy-duty long-haul last year, our refueling quarter strategy is under way, and that's starting to bear fruit with orders for more than 480 trucks featuring Westport heavy-duty systems already announced, and the strong economic conditions favoring our solutions in that market.

Juniper has also shifted into a significant investment in technology and market development, as we told you during the year, including new offices and people in Detroit, we expect to be able to show you good progress on this front next year. Waldo and Weichai are both on track, showing increasingly strong market potential, as we move to launch new products with each Company in the next 18 to 24 months. And finally, we've recently high horsepower programs with CN Rail and GazMetro to demonstrate natural gas in locomotives, and with Caterpillar to evaluate direct injection natural gas fuel system technologies for possible use in Caterpillar's high horsepower products.

Our strong balance sheet, CAD180 million in cash and short-term assets at the end of the year, allows us to continue to invest with confidence in market development and explore new growth opportunities. We continue to work under the partnership and joint venture business models, that allow us to scale market growth rate very quickly by utilizing our partners' production and distribution assets, with relatively low capital investments. Of course, we believe each of our business units, including joint ventures, will ultimately generate significant and sustainable positive cash flow contributions and strong returns for you, our shareholders, as each market develops. Over to Bill to take you through some details, and then Ian to come back and tell us about Emer.

Thanks David, good morning, everyone. The press release, financial statements, and management's discussion and analysis provide a considerable amount of detail regarding our fiscal year ended March 31, 2011, and are posted on our website. During this call, I will focus on revenue, margins, operating expenses, and net loss. All of our financial figures are in US dollars, unless otherwise indicated.

I'll begin with the fourth-quarter results. Our consolidated revenues for the three months ended March 31, 2011 were CAD38.1 million, an increase of CAD3.6 million or 10.4% from CAD34.5 million in the prior year period. Juniper contributed CAD7.4 million in revenue for the quarter. CWI's revenue for the fourth quarter of fiscal 2011 was CAD25.1 million on 773 units delivered, compared to CAD30.9 million on 998 units delivered from the same period last year. The decrease in revenue is due primarily to a decreased line of ISL G engine sales and mix of those engines sold.

Westport HD product revenue for the three months ended March 31, 2011 was CAD600,000, compared to CAD2.8 million in the prior-year period. Over the past several months, orders have been announced for over 480 HD trucks, featuring Westport's technology. The delivery time for these trucks depends on the availability of truck OEM resources and customer fleet turnover requirements. Our development work with Volvo power train is proceeding as planned. For the three months ended March 31, 2011 we recorded service revenue of CAD4.1 million as a result of achieving milestones during the quarter. All costs associated with this development work are recorded as research and development expense in the consolidated statement of operations in the period incurred.

Consolidated gross margin for the fourth quarter ended March 31, 2011 increased approximately CAD6.2 million to CAD17.6 million, driven by higher revenues, and an increase in our gross margin percentage of 46%, compared to 33% in the prior year period. CWI gross margin percentage increased to 46% in the fourth fiscal quarter of 2011 from 40% prior-year period, primarily as a result of more favorable warranty experience. Going forward, we expect CWI margins to be in the 40% range. Westport HD gross margin, not including the service revenue under our Volvo relationship, and gross margin percentage for the fourth quarter of fiscal 2011 was CAD300,000 and 22.3% respectively, compared to a negative gross margin of CAD1 million in the prior year period. Westport HD gross margin includes approximately CAD260,000 from the sale of two marketing trucks that we owned and had fully expensed at the time of sale.

Juniper reported gross margin and gross margin percentage of CAD1.7 million and 23.2% respectively, during the quarter. For the fourth quarter of fiscal 2011, we invested approximately CAD10 million in research and development, representing a CAD2.2 million or 28.4% increase over the prior-year period. We invested approximately CAD900,000 in research and development activity to expand our product offerings to light-duty automotive OEMs, in addition to investments in CWI new product development, our effort under the Volvo development agreement, and supporting our Westport HD products.

Selling, general and administrative expense for the fourth quarter of fiscal 2011 increased approximately CAD3.3 million or 34.2%. This increase was primarily driven by a CAD1.2 million increase in business development and marketing costs for our Westport HD products, and CAD1.5 million from the addition of Juniper. In addition, our operating expenses were negatively impacted by foreign exchange. For our fourth quarter of fiscal 2011, we reported income from Weichai Westport of approximately CAD400,000.

Net loss attributable to the Company for the three months ended March 31, 2011 was CAD14.4 million, or CAD0.31 per share, compared to a net loss of CAD11.7 million, or CAD0.32 per share in the prior-year period. CAD2.7 million increase in net loss relates primarily to a decrease in our 50% share of CWI net income of CAD600,000, due to lower revenue during the quarter, and higher investment in product development for new natural gas engines. The increase in Westport HD operating cost of CAD2.1 million, net unrealized foreign exchange loss of CAD1.5 million, and a reduction of interest income of CAD300,000 partially offset by service revenue of CAD4.1 million, and Juniper net loss of CAD2.3 million, driven by efforts to expand their product offerings to light-duty automotive OEMs.

Briefly turning to the full-year results, for the full year ended March 31, 2011, consolidated revenues increased CAD26.4 million or 21.7% to CAD148.1 million, compared to CAD121.7 million in the prior year. Gross margin for fiscal year 2011 was CAD57.1 million, or 38.6% of total revenue, compared to CAD38.7 million or 31.8% of total revenue in the prior year. Operating expenses, including research and development, general administrative, and sales and marketing, for the year ended March 31, 2011 were CAD72.5 million compared to CAD54.8 million in the prior year. For fiscal year 2011, we reported income from Weichai Westport of CAD1 million, which was partially offset by losses of CAD200,000 from our interest in Juniper, prior to acquiring our partner shares interest in July of 2010.

Our consolidated net loss attributed to the Company for the year end March 31, 2011 was CAD42.3 million, or CAD1 per share, compared to CAD34.7 million, or CAD1.02 per share in the prior year. As of March 31, 2011, Westport's cash, cash equivalents and short-term investment position was CAD180.3 million, compared to CAD104.2 million at March 31, 2010. For the year-ended March 31, 2011, cash used in operations was CAD24 million, with CAD24.5 million used for operating purposes. Changes in non-cash working capital resulted in a surplus of CAD500,000.

Cash used in investing activities included cash paid to acquired Juniper and OMVL of CAD13 million, no cash required, investment in Weichai Westport of CAD4.3 million, and the purchase of fixed assets of CAD3.6 million. Cash provided by financing activities include CAD115.7 million, net of share issuance costs, raising our public share offering in November of last year, and 12.7 million of shares issued for warrant and stock option exercises, partially offset by repayment of our demand installment loan of CAD3.2 million in our first quarter of fiscal 2011. CWI also paid CAD6 million in dividends to each parent company with common share reflected as a reduction of the joint ventures partner share of net assets of the joint venture.

Foreign exchange on Canadian Dollar and Euro-denominated cash balances impacted cash, cash equivalents, and short-term investments by approximately CAD4.5 million. Our cash used in operations increased as we were investing in our current and new technology. We will continue to monitor the level of investments and our cash position. For further financial disclosure, please see our MD&A and financial statements as filed and posted on our website for more details. Just to remind everyone, effective April 1, 2011, we are adopting US GAAP for reporting our financial statements as permitted by the Canadian regulatory authorities. Also, as David mentioned, we're changing our fiscal year-end from March 31 to December 31, to align our financial disclosure with our various joint ventures and business units, which will dramatically help improve our reporting efficiency.

To put in our press release, we have made reference to our calendar year revenues, we just want to put it in perspective. Revenues for calendar year 2009 and 2010 were CAD108.2 million, and CAD144.4 million respectively. For calendar year 2011, we expect to continue our year-over-year revenue growth of approximately 30%, without considering any top line contribution from Emer. If we closed on the acquisition on or about July 1, of this year, Emer is expected to contribute approximately CAD31 million to CAD34 million in additional revenue for calendar year 2011. With that, I will now pass the call to Ian Scott. Ian?

Thank you, Bill. Hello, everyone. As President of Juniper Engines, I'm very pleased to announce Westport's agreement to acquire Emer S.p.A of Italy. With Emer, we will put in place a key element in our focused strategy, and that strategy includes leading technology offerings, strong new market growth, and intelligent use of capital to win OEM leadership in the light-duty alternative fuels market.

With Emer, we will integrate a global OEM-focused business that is the market leader in this space. Specifically, high-pressure CNG systems and components that complement our existing products. Juniper gains new and strong OEM relationships, complementary products in markets, sales and operational synergies, and access into new high-growth global CNG markets. Emer's products, technologies, operations, and most importantly, people, will allow our new Company to challenge for leadership.

To recap, Juniper was formed in 2007, an entry into the light-duty segment, completed Westport's coverage in all major segments, including heavy-duty and high-horsepower through the Westport HD business and the medium duty or mid-range through Cummins Westport. At July of last year, Westport acquired OMVL which became a 100% subsidiary of Juniper, adding world-class automotive customers, products, and skills to our Company. Westport thus became uniquely positioned with the broadest portfolio of advanced CNG and LPG products in the market.

If we turn back to Emer, the rationale for this acquisition is clear. We have new OEM relationships, as Emer directly supplies in a technology co-development agreements with leading OEMs that include Fiat and Volkswagen. We have complementary markets, as Emer is strongly positioned in such companies as Italy, Germany, India, complementing our current strength in China, Russia and Venezuela.

Technology leadership, Emer has long been established as a technology leader in high-pressure CNG components. And complementary products as Emer largely brings off-engine high-pressure products and technologies, and these go from the fuel tank to the engine to complement our existing on-engine fuel systems and components. Finally, sales synergies, the addition of Emer allows cross-selling of a much larger product portfolio, to expanded sales channels. So with the Emer acquisition, we, if I speak of the Juniper group, will now have world-class automotive and industrial OEM customers, including Fiat and Volkswagen as mentioned, PSA Peugeot-Citroen, Magna-GAZ, and Clark.

We will have sales of CNG and LPG systems, components, and engines in more than 50 countries through a global sales force covering six continents. We'll have operations in North and South America, Europe and Asia, and a strong position in high-growth CNG markets including China, India, Russia, and Venezuela. We have established North American experience, which we can leverage as David mentioned, going forward in North America. We have complete engine to tank system capabilities and the backing of a world-leading CNG and LPG intellectual property portfolio includes direct injection technologies.

So the acquisition of Emer firmly establishes Juniper as a full-service provider to global automotive and industrial OEMs. It generates revenues and profits, and will accelerate our growth plans. In addition, we will vertically integrate the supply of components that we have previously sourced for some of our automotive and industrial businesses. So we will continue to grow the new Juniper through new and strengthening OEM relationships, and continued strong after market sales. We will further invest in OEM cross products in new growth markets, such as North American automotive. We believe more strongly than ever in the near and long-term growth potential of the global alternative fuels market.

The acceleration by countries around the world to further develop domestic natural gas supplies for energy security, economical and environmental reasons, is driving increased adoption to CNG vehicles. We now have a solid foundation from which to grow, by providing our global OEM customers with world-class solutions and support. The acquisition of Emer provides an important building block in our vision for global alternative fuel leadership in the automotive and industrial segments. Thank you.

Operator, now open up the call for any questions.

(Operator Instructions). Our first question today comes from Laurence Alexander of Jefferies, please go ahead.

Good morning, this is Rob Walker on for Lawrence.

Good morning Rob.

First question, if you could explain a little more about the rationale behind the acquisition, and how this fits in, or maybe essentially adds another catalyst to the four you laid out during your most recent capital raise?

Ian, do you want to try some of the rationale for the acquisition?

Yes, Emer is a technology leader in their space. And as I mentioned in the discussion, what they bring is they bring the off-engine components and fuel system that complements what we have today. Today we concentrate mainly on-engine, and Emer brings the off-engine piece of it, so it's analogous to the heavy-duty business where you have the off-engine and on-engine, and this will allow us to obviously supply complete systems to OEMs, and that's very attractive from the sales standpoint.

So we have that, we have the obviously the sales, we have a much larger sales force, complementary market, so we have our existing products today that we are going to be able to cross-sell through those sales channels, be it Emer through OMVL channels or OMVL through the Emer channels, so this is very attractive to us, and again, with Emer, they really have an OEM focus and considered a leader in their space, strong intellectual property portfolio, so for all these reasons, if we are going to really challenge for leadership, and really drive to be the number one with OEMs globally and speaking of Juniper now, we need to have to have that complete system capability, and Emer is the one company that we identified globally that made sense to go after.

I'll just add a bit to that, Ian, it's David. Remember what we've been saying for some time now, and certainly in the prospectus when we did our offering in the fall, is we really see a shift happening in the industry in light-duty, away from after market conversions, which have really dominated this industry for a decade, to true OEM products, and the design and the packaging of those OEM products is going to be very different, require very different technologies than we've seen in the market. This is really what were challenging for. We think that we've got the systems capabilities and the experience to deal with the global OEMs, and have a successful product for the next decade. And we think that this acquisition really is going to enhance Westport's ability to provide those system solutions to major automotive OEMs. So very strategic, very timely, and kind of rounds out the portfolio so that we can have complete solutions.

Thanks, and then just a quick follow-up, on the HPDI business. Two questions, I guess one, in terms of the roughly 500 units have been announced, in terms of the timeline for those, should we expect those to be back-end loaded primarily, and then in terms of ASPs for those units, obviously this quarter there was distortion with the marketing units, even backing those out, ASPs seemed quite high, but it was only two units, so can you talk about a normalized ASP for that segment over the next year? Thank you.

We've been using 55,000 as our modeling ASP, we think that's reasonable. Obviously, prices and costs are coming down rapidly as we see some volumes, but at the same time, systems are getting more complex, and we are seeing people interested in extended warranties and multiple tank systems. We think that's a realistic average number, but of course, there's no such thing as an average sale.

In terms of build slots, as I'm sure everyone knows, the Class A truck market is back after a couple of years of real depression caused by the economic downturn. So I'd say that the build slots are at a premium, no one is just getting a truck to drive off the lot, unless, as we did this quarter, we had people saying, give me those demo trucks and we will pay for them. So right now, delivery times are extended, four to six months is pretty reasonable. As you look at the timing of the announcements, you should expect that you're going to see truck deliveries four to six months afterwards, and that's going to mean back-end loaded in the year.

Particularly, as we change our fiscal year, so that we're going to be wrapping up this year in December. What we need to do of course, is to work with our OEM partners, Peterbilt and Kenworth, to assign build slots to these customers, get the flow going, and of course add to that backlog going forward.

Thank you very much.

The next question comes from Graham Mattison of Lazard Capital Markets. Please go ahead.

Hi, good morning, guys.

Hi, Graham.

Just to follow up on that last question and the timing on the order slots, typically if someone, say, a trucker down at the ports, where they have the fueling infrastructure to place in order for 15 trucks, five Freightliner's with ISL Gs, five [PACR] platforms with ISL Gs, and five PACR platforms with HPDI. What's a typical delivery time for those three type of trucks?

There are all about the same. Obviously, there's slight differences with the brands and plant loading, but six months is a pretty good guideline these days for pretty much any diesel truck. Obviously, we don't want to have things impacted by our own supply chain, so we are working with our suppliers to make sure that we are ready and we've got a pipeline of any critical natural gas components. But as much as possible, we want to accelerate those deliveries for a strategic customers getting going with LNG.

All right. Obviously, looking at your revenue guidance for the year, you're definitely expecting a pickup in the HPDI shipments, but what are you seeing on the Cummins Westport side in the channel for the rest of the year? Is this the key part of the growth that we are looking for, or will it be more evenly split between CWI and Juniper?

I think if you look at the percentage growth for each of the units, Graham, obviously, heavy-duty is going to a spectacular growth on a small base. They're going to contribute, but really the goal here is not a growth percentage, it is to take the business from the heavy investment that we've had into sustainable cash flow. We think that's within reach now. We can see the business developing, and we see the cost structures, so as we talked about, if we can get the business to 250 or 300 trucks shipped a quarter, that should be in positive cash flow, including the market opportunities much bigger than that. We should start to see the business go from heavy investment to hopefully very successful cash flow.

On the Juniper front, Juniper last year was more or less breakeven toward the end of the year, we've seen heavy investment in new technology, and some new projects that we would expect are going to be very productive. So Juniper, I think is going to see investment and growth as well. Particularly when we see some of the synergies under this new acquisition. We are very excited about the potential in Juniper.

CWI has been doing very, very well. You can see from the margins, and the operating leverage that we're seeing out of CWI, that really has been our bellwether business unit. It's moving into a new strength as well as we come out of the recession, we've seen a lot of pressure on local government budgets and they're really the ones that drive things like transit buses and refuse trucks, at the same time we seen such pressure on the fuel price volatility for these local governments that they are really leaping into natural gas as a way to help manage her budget. Reduce operating costs, but also get some cost certainty going forward.

As a result, we are seeing major new orders in transit and refuse trucks in the United States, that I think are really going to sustain growth for CWI for some time. We expect CWI to have a very good year as well. And a regional trucking business that got started at the ports with CWI is of course expanding, and piggybacking our work on LNG corridors with the heavy-duty side. All of the businesses are firing well, we expect growth globally in all of our markets, China, Europe, and North America, South America, and so we're looking forward to continued building the business and every one of the business units.

There's some pretty public announcements out there, Graham, as you know, Dallas is that the public transit RPL for 475 units, New York Metro has an option for 150, which can go up to 450 as well. There is a pretty public quarters, which helps, specifically for Cummins Westport, pretty strong areas for growth over the next 12 months.

Our great, I will jump back in queue, thank you.

Next question comes from Rob Brown of Craig Hallum. Please go ahead.

Good morning.

Good morning, Rob.

If you step back and look at your maintenance investments now and when you combine Emer in, what's the margin profile and size of that business that you see it getting to, the next couple of years?

Rob, this is Bill, I think you're going to see margins are very similar what you're seeing in the existing Emer business. We're just adding on products that complement the on-engine system. If we get to the finish line with this acquisition as we get in there, we'll get a better understanding, but today, when we are looking at the attractiveness of the opportunity, and how it complements our existing business, we use a fairly similar gross margin as our existing OMVL business. We will be able to provide a little more color once we get in there, and get through the integration process of that business. Hopefully, we are expecting some synergies and we'll try to work down a path to where we can realize those, and hopefully we will start seeing some improvements are in the business and contribution.

Okay. And in terms of operating margin, do you see this getting to the CWI operating margin range? Is that how you see this business?

Probably not, because you look, CWI is an asset-light business. This is -- it's a little bit different business model, but we are actually a vertically-integrated manufacturer. We might -- we expect to see lower operating margins than what you see in the CWI business model.

Okay, good, thank you. And then in terms of your color on the backend loading of the ramp, could you remind us again where you're -- or what your capacity as in this ramps and when you need to have additional capacity ready for the HPDI business?

I think the HPDI business has got lots of capacity. We've seen quarters in the past, as were shipping to the ports project, as you can remember that far back, when was that, two years ago or something, there's plenty of capacity for the order flow that we've got now. And clearly what we want to do is look forward 6 to 12 months going forward, we want to be able to have enough visibility as to what demand is and to adjust the supply chain. I think the work we've done over the last two years to work out those supply chain relationships and partnerships give us lots of flexibility, and ultimately, of course the capacity is in the industry.

We are going to be building trucks and engines that are similar to diesel trucks and diesel engines. All we need to do is make sure that we can use those existing assets where we can. The focus is on getting some visibility for our suppliers and partners, and making sure that they can gear up and allocate their own capacity. It's not as if we need to go build a bunch of plants.

Thank you.

The next question comes from Eric Stine of Northland Securities. Please go ahead.

Hi everyone, thanks for taking the questions.

Hi, Eric.

Wondering if we could just a stick with Emer. I'm interested in the -- what you see in India, and just the opportunity there. My impression has been that's a high-growth market, but unlike Pakistan, which there are some firmly entrenched players that India is pretty wide open. How do you see that developing?

The Indian market, as I think we talked about in the press release, Emer has a joint venture there called Emer Minda, and that joint venture supplies Suzuki Maruti, which is actually the largest auto OEM in India. What's happening in India right now is, you have very strong push for fuel station infrastructure, they are building out pipelines, to not even the largest cities, but into the next level of cities throughout India. And as you indicated, there's very strong belief that India over the next five to 10 years will be one of the high-growth CNG markets. What we have in Emer is we have an established presence, the joint venture is up and running. It's supplying today to the largest OEM in India, and we are just very bullish on this -- and continue to grow that business.

Okay. Maybe sticking with Juniper, I know in your release, you talk about finishing testing for the stationary engine. Just wondering if you can remind us of the market opportunity there and how you see that developing over time?

Sure. What we did is we had a one-year field trial with five engines, stationary engines in the oil-field sector, and that completed actually at the end of April, and as we said before, we are still on schedule to launch the second half of this year, and with the application there is, when we talk about oil-field, these are engines that are running 24/7 and they can be driving electrical units, similar to power generation, but they are not actually a power generation application, or hydraulic units and similar.

And so the test went really well, we are working on our launch plan proceeding towards that, in the oil-field sector alone, there are literally tens of thousands of engines out there operating, if not hundreds, if you include the complete US and North America. Very high turnover of these products, generally we're working on a higher-durablility product, so hopefully our product won't turn over as fast as some of our competitors. But the same engine, the same similar application would be just in normal power generation applications, agriculture for pumping and so we are very excited about this, and like I said, we hope to obviously launch in the near term, and we believe that's going to be a very strong market for us.

And have you discussed what ASPs will be on that?

You're in the -- typically what we are doing there is we're selling the complete engine, so we are going to be in the CAD3,000 to CAD4,000 range, something like that.

Okay. Maybe moving to the forklift side, just curious, you are providing engines to Clark, how much room do you feel like you can grow there and then I'm just curious about the market opportunity with be Chinese forklift OEM, that it sounds like you've just started testing and how you view that relative to the size of Clark?

The Clark opportunity, we are going to -- Clark is actually seeing some very nice growth at the moment, and so we are, obviously what we wanted to do, is we launched our product last May and we wanted to fully support Clark and ensure that we have enough time and experience and operating hours in place to be very comfortable with the product. We are now at that stage, I believe that through Clark alone, we are going to see some very nice growth with our product. But what we are doing now is we are aggressively seeking additional OEMs, and as you indicated, we have a Chinese customer that's currently testing product, there will be others as well.

What's interesting is the draw towards Juniper, one of the big draws towards Juniper in this case is really again, we are considered -- we have a very advanced fuel-efficient high-powered torque product. And so, in the case of Chinese customers, they not only would have the potential ability to sell that domestically in China, but also into North America as well, and other more strict markets. So we're going to not only service these two OEMs but we are going to grow into other OEMs as well.

Okay thanks. Just one bookkeeping, given that you have Volvo service revenue this quarter, should we assume that you will not in the next?

Yes, no, that's a safe assumption.

Okay. Thank you very much.

The next question comes from Matt Gowing of Mackie Research Capital. Please go ahead.

Hi Matt.

Mr. Gowing, your line is open.

Sorry, wondering if you could speak about the Westport HD lease program that you commented last quarter, will that program be -- play a role in these 480 units that you've already announced? Or how should we think about the implementation of the leasing program going forward?

I think -- let's be very clear here, it's not a Westport leasing program, we are working with leasing companies like PacLease so there is financing available for natural gas trucks. This is really what was new last quarter, was there wasn't the ability to finance the trucks because there was no -- they just didn't have the numbers for things like residual value or maintenance costs. We've been working for some time to enable people to finance the trucks, however they want to do that. And make sure that the paperwork can be filled out in such a way that those companies are comfortable.

I think the thing that surprised us about that announcement was that a lot of our customers were waiting for certainty like that, on what is the residual value, and it may be low, but at least there's a number now that out there in the field saying, here is the worst-case that we can foresee, here's a guaranteed buyback price that you will see in four years or six years, so that was very helpful.

The other thing was very helpful was announcing the life of truck service plan. This has been available on diesel trucks, from Peterbilt and Kenworth dealers and so all were really doing is mirroring that with our version of the program at the dealer for the LNG trucks, built by Peterbilt and Kenworth. Again, that's really helped erase some of the risk for these new fleets of taking on such a new and unknown technology. This has put a cap on what their maintenance costs and parts cost might be, those are always big uncertainties in any new technology as far as the customer is concerned, so this has given people confidence that really all of the big unknowns in that life cycle cost picture are now filled in.

Whether they are actually going to be that high, in terms of maintenance costs, or whether residual value is going to be that low is somewhat irrelevant because the numbers are good enough to see very attractive economics to a fleet that are reasonably high mileage. So that's really the target market is those sophisticated high-mileage fleets. We need to build the infrastructure that they are going to need, they will be the lead customers we expect on these corridors and that will enable other people to get going.

Of course, over the next few years, we're going to secondary markets develop for natural gas trucks that will fill in some of the lower volume fleet. So really what the financing program I think has done is not necessarily create a financing offering that everyone is going to take, one sees the first offers you may have were taken by those customers, it didn't work, but more importantly, the public availability of these numbers and offers is giving a lot of our fleets confidence in their own estimates going forward. On these critical life cycle costs. I think that's what has catalyzed some of these major sales. Does that answer your question, Matt?

Yes, that's helpful, thanks. And a question relating to the CWI volumes this quarter. We saw them a touch under 800 units on the quarter, and I guess this is the first quarter where we saw the expiration of the tax credits in the US play a role. So, could we expect this sort of volume number out of CWI in the next few quarters for the foreseeable future? With this quarter being a good indication because of the tax credits? Or is there going to be some improvement on the organic growth rate as you alluded to before?

We've always cautioned people that CWI is lumpy and is quite a range of products, so the unit count is what it is, it's not necessarily a guideline to what's going on. As we said earlier, the strength this year has been in the refuse markets, did very well last year, it's going to do even better this year, I think, and the box market, we think is returning. Overall, I think you're going to see more robust growth in CWI next year than last year, although last year was pretty good, and obviously, the bottom line contribution was very strong.

I think the tax credit influence has been overplayed. I know there's been a lot of worries about the expiry of the tax credit. Much of the business that we've been doing over the past few years is not credit-related anyway, local government business isn't eligible for credit or has no real impact on their buying decisions. And even on the regional trucking markets, we have seen the credits are interesting if you can get them. I'm not sure it is motivating people to move ahead. It's a nice thing that helps out the spreadsheet.

But people are moving to natural gas for a number of reasons. Some of which are energy security, insulation from future oil shocks, local regulation, competitive advantage, the fuel savings they are getting today, so the tax credits, I don't think are really that important to our current customers. Obviously they're not important to our current customer, because they're not waiting for the credits. Whether we would see a different market dynamic if credits were reintroduced, I really can't say.

I think we can say with some confidence we've got our hands full of business today, we think there's lots of business that can be done, particularly with high mileage fleets on the heavy-duty side with urban fleets on the CWI side, and I think you're going to see lots of new orders. I wouldn't be comfortable telling you're going to see a flat CWI, I think you are going to see some strength this year.

Thanks. And approximately how much your CWI business historically is from the government customers?

Disproportionate, because their business strength, as you remember is mostly being transit bus and refuse, now refuse is typically private fleets these days, people like Waste Management and Republic, but their ultimate customer is usually a local government. So what is driving the local government interest in refuse as much as anything, has just been the fuel price volatility in diesel fuel and the inability to deal with those costs on a pass-through basis. Most truck fleets have been passing through diesel costs with a fuel surcharge and a local government just doesn't have that lets them deal with that volatility.

It's been very popular over the last year or two to move to natural gas, because they can get budget certainty for a period of up to five years, as well as cheaper fuel. So I think the refuse business is going very well, market penetration rates are up, I think it's well proven that there is great benefits between the natural gas there. Are you going to get a credit as a private fleet, or is the public sector contract negate -- none of those questions are really relevant, we think the decision is being driven by fundamental economics and the pricing of services in that business is going to be affected by the credit or not. The government is being swamped by the fuel price advantage anyway.

Great, that's very helpful, thank you.

The next question comes from Tom Daniels of Stifel Nicolaus. Please go ahead.

Good morning, guys, thanks for taking my question. I guess I just wanted to follow-up on the previous question, and kind of focus on organic growth. When look at the unit volumes numbers, it looks to us like unit volumes for CWI were down year-over-year, about 4.7%. And then in the first quarter, here with no tax subsidies, down close to 22.5%. I know you said it was lumpy, could you give us a little more detail, were there quarters that got pushed out, or am I reading too much into the unit volumes being down 22.5% this quarter?

I really think that statistically, it is too small a universe to really drive a big conclusions from. We've always tried to tell people look at this over a two or three-year period, you'll see the pattern very clearly. But quarter-to-quarter, sequential quarters, year-over-year is really somewhat irrelevant. Just because of the volatility and if you have one large order shipped, on a quarter, and then you don't have one the next quarter, or the subsequent quarter, it might look bad. It really doesn't have much influence.

If you look back last year, Q4 of last year was very strong for CWI, disproportionately strong, unit count was way up. But that's a good thing. Not a bad thing. I think you're going to see strong quarters like that going forward, and you're going to see lower quarters, but the overall trend over the past five or six years has been 30% compound growth and we think that CWI has got that capability going forward.

Some markets have been choppy, there's no better word really. The economic meltdown in 2008 really threw a loop into lots of fleet budgets and local government budget. CWI has managed to navigate through that, have stable flat markets as well as some growth in some markets, don't forget that we had a very large shipment to Delhi over the last 18 months that's finished now. So you're saying shifts in markets and customers that are just very natural because of the way this business flows. Over time, as we got higher volume, I think maybe that's the point we can start to look at some statistical analysis but for now, it can be quite misleading to do things on a quarter-to-quarter basis.

Okay, thanks for that. Perhaps in regards to Volvo, have you guys finalized the agreement in terms of when Volvo natural gas engines started being shipped, the payment terms, how much is Volvo going to pay Westport, and things along those lines?

Yes. But if your next question is, tell us about it, no.

Okay. You wouldn't be able to disclose if you have any chance of doing a CWI type JV with Volvo, do you? Focus on another type of --

We're speculating now. I think I can say that the thing we've seen all of the world in all of our OEM partners is the realization that natural gas is going to be a big part of their business. This is whether we're talking the automotive business in India, or the heavy-duty truck business in China, or as you've just seen, off-road business, locomotives, mine trucks, things like that, everyone has seen the urgency of getting their product line enabled with natural gas. And not just throw some gas into the mix.

They want to have a product that's going to be competitive and compelling, because there's real opportunity to change your market share dynamic. This is a really exciting time t with the OEMs. I think our experience with Volvo is mirroring our experience with Weichai, the markets are growing much faster, the demand is much broader than anyone hoped, even two years ago, being driven by the fundamentals on oil prices and natural gas prices. So, there's a real scramble to get product to market.

These are very complex, expensive of projects, we have to align it with the product plan, with the base OEM. It's not as if we are just taking our product and freezing it for all time, we want to build an engine with natural gas that is in parallel with the state-of-the-art diesel engine. And there's a whole bunch of change coming in the industry over the next few years due to the emission standards and reliability and carbon and things like that in Europe. So, many variables to be considered.

But overall, I think that the market opportunity is very exciting. And that's, really what's compelling all of our OEM partners, to move as fast as we can. I think you're going to see a very successful product launch for what we are doing with Volvo, but Volvo is a very big Company with lots of market coverage and certainly it is our hope that we would spread throughout the Volvo system over the next decade, and it could be a lot of fun.

Okay great. And still about 18 to 24 months before you start releasing that program?

Yes, we haven't announced launch dates, that's really up to our partners to do, I think it's realistic is to expect that these programs are roughly 3 years from start. A lot of that is just testing. We will see engines on the road with customers before then, but in terms of broad commercial availability from the factory, that's a realistic time estimate.

Great, thank you very much.

The next question comes from Michael Willemse of CIBC. Please go ahead.

Thank you, good morning, and thanks for putting the call in the morning so we can watch the hockey game tonight.

Did it just for you, Mike.

I'll start with the Emer acquisition again. Can you give us a sense of percentage of sales by industry? Is it primarily all the automotive, and then by region as well, geographically?

Yes, primarily automotive, as I indicated even in our Juniper industrial business, we do take some small quantities, but consider it automotive, consider it, the vast majority of that to be OEM, but they do have a very large after market business as well. Geographically, what was exciting for us is that they really have a strong presence in Europe. OMVL has a reasonable presence in Europe, but tends to be stronger in some particular markets outside of Europe. Within Europe, Italy is of course one of the big ones for Emer, because they do supply Fiat which is the number-one OEM with respect to CNG vehicles. Other European countries such as Germany, Poland, these are very strong for Emer, but Emer does sell globally, much like OMVL and I spoke about India earlier, so another great growth market. They do sell also into Russia, which OMVL sells into today. But it's really Europe and India, I think you can think of as the dominant markets.

Over 80% of sales would be in those, in Europe and India?

I'm sorry, can you repeat? You cut out.

Over 80% of sales are that type of number, or well over that?

It would be the majority. I'm not sure if it's exactly 80%, but it's more than half.

And then just wondering why the -- it said in the press lease that upon closing, it's expected that debt would decline by about EUR25 million, what's driving that?

Currently, as we mentioned, we already have -- the net debt in Emer is approximately CAD53 million, so to make the cash flow work and make sure the business starts off on the right foot, we made the commitment to pay down a certain portion of that debt, so it's just not overburdened with those interest payments and principal payments.

Okay, so it will be Westport reducing that debt?

Correct.

Okay, just wanted to -- I thought maybe there something else. And then the growth at Emer then, is it going to be driven by new platforms? Like, if you look at the light-duty, heavy-duty market, it's really driven by orders, but in light vehicle, and we generally wait for the OEM to announce a new platform with a supplier. Is that going to be the driver for growth at Emer? I guess the after market to be more near-term, but as far as longer-term growth, is it primarily going to be just driven by new platforms by OEMs?

Yes, you're right. That's typically the way the business works as you described. That, as they update platforms or bring on new platforms, if you are the leader in the space, as we will be when the acquisition goes through, obviously, you are in a great position to continue on within the OEMs as we all realize, there's a very high switching costs, so as long as we continue to innovate and provide strong products, we would hope to grow the business, as you mentioned.

I wouldn't discount the after market, as David has been emphasizing during the call, we really believe that globally, there's going to be continued strong growth for CNG and LPG and the after market business, while it may not require the investments that the OEM business requires, it is still going to be a good portion of our growth going forward.

Okay. And then just lastly on Emer the European car market is pretty weak right now. Is there a sense that it's kind of bottomed out, because I know your sales forecast for the rest of the year is pretty flat. Is that the sense that the European car market have bottomed out from here?

Yes, I think going forward, we would not expect the European car market, at least the sales in our sector to continue to decline, as you are aware in Italy last year, we intent went away and that was a big hit to the business, that everybody is still recovering from, but like I said, Europe is a primary market, we are confident that's coming back, and we are going to be able to grow in the market and as Bill alluded to earlier, we need to get inside the business and really understand it once the acquisition closes. But we anticipate that the guidance that we have given for the remainder of this year is doable, but we would hope to grow more aggressively in 2012 and beyond.

Thank you. One more question on -- this is on the heavy-duty business, David, you suggested once an order is placed that the shipments could be four to six months later. If your backlog now is 480 units, is it safe to say that it should be shipped over the next couple of quarters?

Yes, the next couple. Don't forget that some of these are large orders with a single fleet, looking at Darren, Heckman for example is 200. Some of this needs to be staged with the needs of the business. It's not at a they want to have 200 trucks show up on Friday. They want to be able to integrate them into their business and have infrastructures built, so there's going to be discrete lumps of trucks, lumps such a rude word. We need to come up with a new word, like a gaggle of trucks or something.

They will be delivered according to the needs of the business and infrastructure. It may not be just a convenience of the truck plant. But in general, I think you should expect that we are seeking to get that business to the 250, 300 trucks a quarter, as soon as possible. And it's not going to happen next quarter, but toward the end of this calendar year, early next calendar year we would expect the business to be operating on around that level.

Great, thank you very much.

We are now at the time allotted for today's conference call. I'll now hand the call back to Darren Seed for any closing comments.

Thank you very much, everyone, I look forward to seeing you on our quarterly conference call, expected in early August.

Ladies and gentlemen, the conference has now concluded. You may now disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye. But by. (End of Transcript)