Westport Fuel Systems Inc (WPRT) 2012 Q3 法說會逐字稿

Hello this is the conference operator welcome to the Westport Innovations Inc. fiscal 2011 Q3 and year-end financial results conference call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions). At this time I would like to turn the conference over to Darren Seed, Vice President of Investor Relations and Communications. Please go ahead.

Thank you and good afternoon. Welcome to our third quarter and year-end conference call for fiscal 2011. It is being held to coincide with the disclosure of our financial results earlier this afternoon.

For those who haven't seen the release and financial statement yet, they can be found on Westport's website at www.westport.com. Speaking on behalf of the Company will be Westport's Chief Executive Officer David Demers and Westport's Chief Financial Officer Bill Larkin. Attendance at this call is open to the public and to media, but for the sake of brevity, we are restricting questions to analysts.

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 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 undue reliance on any forward-looking statements. Now I will turn the call over to David Demers.

Thanks Darren and good afternoon everyone.

Now with the shift to a calendar year-end, this quarter marks the end of our fiscal year. Technically we are reporting the three quarters or nine months ending December 31 as the year, but I think for clarity and ease of comparison, it will be more useful to refer to 12-month periods in our discussion today. So, going forward, I will be talking about comparing the 12 months ended December 31 to the 12 months ending the previous year.

Now as you can see from the statements, the strong growth trends have continued across our business. Revenue for the quarter was over $100 million, which is another record. And this took revenue for the calendar year to about $264 million, which was well above our most recent guidance.

We have seen strong demand around the world and in all segments. I think the record this year supports this. If you look at the details of the statements, Cummins Westport was up 40% for the year.

Our light-duty division was up 300%, heavy-duty up 185%, Weichai Westport in China was up 145%. Overall our Q4 revenue was 155% stronger than the same quarter last year. Overall for the year we are up 83%. So, we expect to see continued strong growth this year in 2012.

Growth is going to be driven by our existing products in existing markets as well as new products that are coming in a reasonably continuous stream over the next 3 years. Like to focus just for a minute, and I know Bill is going to touch on this as well, R&D has ramped up this year to over $53 million compared to $32 million in 2010. R&D is about future products, of course, and we are confident that these investments at this time are important and will have strong returns in both market position and profit contribution.

You have heard about some of these programs. We have been investing heavily in the new CWI 12-liter engine, which is now in field trials. We have our Volvo engine program. There is a new program to develop a heavy-duty truck engine in North America.

We are launching Ford F-250 and 350 pickup trucks in the second quarter this year. We have a major program to launch and HPDI truck in China with Weichai early next year. And we are investing with partners like GM and Caterpillar to develop new technologies in new markets.

So I said the last quarter we believe 2011 will be seen as the tipping point, where natural gas became globally accepted as our second major transportation fuel. We have told you we are shifting our management focus from creating market awareness, which is what we have been doing for the last decade, to really entering markets with leading products and reaching market penetration rates that approach 20% or more. We think this is a good start.

Our priorities today, as ever, are first to sell what we have today and to create successful customers with those products. But second, to successfully complete our many product development programs with our new relationships which will expand our reach both geographically and in new segments.

Third, we want to exploit our leadership position to capture new opportunities with new OEMs at this critical transition to a new energy source. So, without further ado, I will turn it over to Bill to go through the numbers.

Thanks, David. Good afternoon everyone. This afternoon I will discuss revenue, operating expenses, net loss and cash flow for our quarter ended December 31, 2011.

As a reminder, we have changed our fiscal year end from March 31 to December 31. Therefore our financial figures presented in our consolidated financial statements for the fiscal year ended December 31, 2011 represent a nine-month stub period.

All of our financial figures are in US dollars unless otherwise indicated. And effective April 1, 2011 we adopted US GAAP for reporting our consolidated financial statements. Therefore, all prior-year amounts in our consolidated financial statements are presented under US GAAP.

Moving on to the quarterly results, we had a record quarter for revenues with consolidated revenue for the 3 months ended December 31, 2011 of $100.6 million driven by growth across all lines of our businesses. This represents an increase of $61.1 million or 185% compared to the prior-year period.

Westport light-duty earned $22.6 million in revenues during the quarter compared to $7.8 million in the prior-year period, driven by contribution from the acquisitions of Emer in July 2011 and AFV in October of 2011. Since the acquisition and through December 31, 2011, Emer generated $31.8 million in revenues which was in line with our expectations of $31 million to $34 million.

DWI earned $87.7 million in revenues on 2011 units during the quarter compared to $31.1 million on 1036 units in the prior-year period, representing an 86% increase in revenues.

Westport heavy-duty earned $10.5 million in revenues with 170 HD systems shipped during the period compared to $600,000 in the comparative quarter with no HD systems shipped. In addition we recorded $9.8 million of service revenue as a result of achieving certain milestones during the quarter under our development agreements.

Our consolidated gross margin for the quarter ended December 31, 2011 was $39.6 million, an increase of $26.7 million compared to the prior-year period, which was driven by higher revenues and increase in our gross margin percentage to 39% versus 33% in the prior-year period.

Westport light-duty recorded gross margin and gross margin percentage of $4.5 million and 20% respectively during the quarter. Westport LD's gross margin and gross margin percentage for impacted by the step-up of Emer's inventory when allocating the purchase price to the assets acquired in assumed liabilities. And taking this into consideration, Westport LD's gross margin would have been approximately 27%.

Going forward we expect Westport LD's gross margin percentage to be in the mid-20% range.

DWI gross margin percentage increased to 44% in the quarter ended December 31, 2011, from 37% in the prior-year period, primarily as a result of more favorable warranty experience and mix of sales. DWI's gross margins reflect the maturity of our current product offerings and product mix.

Going forward as CWI launches new commercial offerings, for example the ISX12G, we expect the gross margin percentage to decrease as new product offerings are typically burdened with significant warranty calls. Therefore, we expect our gross margin percentage to decrease to the 30% to 35% range. However CWI's gross margin dollars should increase as we expect revenues to increase driven by new product offerings.

Westport Heavy Duty gross margin, not including the service revenue, was breakeven for the quarter. Over the next several quarters, we expect our Westport HD margins to improve as volumes increase and we realize our cost reduction initiatives, including our warranty experience on this product.

We will manage this business to break even at approximately 1200 HD systems per year if gross margin improves to 20% at an ASP of 60,000. However, at maturity, we are targeting margins for the Westport HD product in the 30% range.

For the 3 months ended December 31, 2011, operating expenses, research and development, general administrative, and sales and marketing were $38.1 million compared to $20.1 million in the prior-year period. We interested $18.1 million in research and development during this quarter, representing approximately 47% of our operating cost. This is an $8.4 million or 87% increase over the prior-year period.

This increase is primarily related to the expansion of our Westport light-duty product offerings to automotive OEMs of $3.6 million; Westport Heavy Duty R&D activities increased by $2 million for current product support and cost reduction initiatives; increase in Volvo development program spending of $1.6 million; and a corporate R&D of $1.2 million related to research and development activities for future products. And Weichai and CWI combined were flat for the quarters.

General and administrative costs for the quarter increased by $6.1 million compared to the prior-year period, mainly due to the consolidation of Emer of $1.8 million and increased headcount to support natural gas market development and OEM partnerships. Selling and marketing costs for the quarter ended December 31, 2011 increased $3.6 million, primarily driven by OEM-related market development initiatives.

For the quarter we recorded income from our Weichai Westport joint venture of $600,000. The net loss attributed to Westport for the 3 months ended December 31, 2011 was $14.5 million or $0.30 loss per share, compared to a net loss of $13.5 million or $0.31 loss per share in the prior-year period.

As of December 31, 2011, our cash, cash equivalents and short-term investments balance was $85.7 million compared to $105.6 million at September 30, 2011.

During the quarter we generated $1.8 million in positive cash flow from operations. This was offset by cash used to pay a $10 million dividend payment from CWI to our joint venture partner, $8.2 million in capital expenditures primarily to expand our R&D capabilities, $2.6 million for the acquisition of Emer. During the quarter we made an additional $1 million investment in our Weichai Westport joint venture, and $900,000 and in principal payments on existing loans.

Subsequent to the quarter end, we raised $266.3 million in net proceeds for the issuance of our common shares. And our current cash balance including these proceeds is over $330 million.

For the 3 months ended December 31, 2011, our adjusted EBITDA was a loss of $1.4 million. Please see a reconciliation of adjusted EBITDA in our earnings press release dated today.

Now turning to the calendar year results, and this is for the twelve-month period. For calendar year 2011, consolidated revenues were $264.7 million compared to $144.4 million in the prior year, an 83% year over year increase.

Consolidated gross margin for calendar year 2011 was $98.3 million or 37% of total revenue compared to $50.9 million or 35% of total revenue in the prior year.

Operating expenses for calendar year 2011 were $114.6 million compared to $67.1 million in the prior year.

During calendar 2011 we invested $53.3 million R&D, representing 46% of our total operating cost.

For calendar year 2011, we recorded income from Weichai Westport of $1.9 million.

Our consolidated net loss attributed to Westport for calendar year 2011 was $60.2 million or $1.26 per share compared to $39.5 million or $0.98 per share in the prior year. We are investing in our future, and our net loss is primarily driven by our R&D investments.

As announced in our press release last week, we are providing guidance for calendar year ended December 31, 2012. We expect consolidated revenue to be between $400 million and $425 million, representing approximately 50% year over year growth. This increase in revenue is driven by organic growth across all our business lines, and introduction of new products such as the Westport WiNG system on the Ford F-250/350, which is expected to launch in the second quarter of this year.

For further financial disclosure, please see our MD&A and financial statements as filed and posted on the Company's website for more details. I will now pass the call back to the operator to open the call for questions. Operator?

(Operator Instructions). Peter Christiansen, Bank of America Merrill Lynch.

Thanks for taking my questions. I want to focus on light-duty real quick. Bill, I'm not sure; I think I may have missed it, but can you talk about why the gross margin was down sequentially, considering you had some charges last quarter? And in terms of the WiNG project I think -- we're on -- I think you -- it has been mentioned they are only expecting a couple million this year. It is really a 2013 contributor. Has that view changed?

Let's address your first question on the gross margins. It's part of acquiring a company. We have got to do a -- we have got to allocate the purchase price over all the assets and liabilities. And a lot of the current assets are stepped up going through this process, and then that gets -- flows through the P&L as we consume the inventory, for example here.

And so we got through the rest of it the rest of that inventory this quarter. And so if you take that away, our normalized gross margin for the quarter would have been around about 27%. Going forward we expect our Westport light-duty to be in the 25% range.

And then I think to address your second question on the WiNG, I think we have communicated that we expect to deliver approximately 500 units next year at an average price of roughly about 10,000 units. So we are targeting about $5 million in revenue from the WiNG system next year.

Great, and on R&D, especially with the new program that was just recently announced. Are you able to take learnings from your existing programs, whether it be Volvo or HD, and bring it to new development programs that could potentially bring a new product to market quicker and also less costly?

Sure. When you go through one of these projects for the first time, there is a learning curve. And then as you -- as we try to adapt this technology to future engine platforms, we believe we can do it much quicker and much more cost-effective.

However, the time is a very specific process that we have to go through in these engines to get through the certification process. They have to spend several months in a test cell. So even though there is a learning curve there, we don't have the ability to condense the timeframe of bringing the product to the market, just because of the standard process of getting the EPA certifications.

Okay, thanks. I will jump back into queue.

Laurence Alexander of Jefferies.

Good afternoon, this is [Rob Walker] on for Laurence.

Hi, Rob.

I guess first -- I guess are you seeing much movement since the end of the quarter in terms of order patterns and your visibility into your backlog? I guess at what point in the year should we expect to it to potentially pick up? And it looks like in the quarter, the HD orders booked, the ones you called out were slightly less than the units you shipped.

Everybody is looking at me, so I guess I get it. (Laughter). Yes, I think -- I mean the names that got published in the press release are a little bit less in order to ship -- again, I'd remind people that it's not everything that was ordered. It is not everything that is in the backlog.

Major challenge on getting the business growing, and I hope everybody notes that we did double shipments quarter over quarter from fourth quarter to third quarter. We are expecting to continue that growth this year. No, I am not saying we are going to double every quarter, quarter over quarter.

But the demand as it comes in, there is a lag from order to shipment. That is just the way the business works these days. 4 to 6 months is a pretty realistic expectation on getting a truck built and delivered to a customer, and we have to coordinate that with the infrastructure build.

Been lots of movement on the infrastructure side; I am sure everybody has read some of the press releases and the comments, but all of that infrastructure is coming toward the back half of 2012 -- it is not here today -- and through next year. So lots of excitement, lots of action, but let's keep a lid on crazy expectations on how fast we grow by 10 times or 100 times.

I think the order backlog is building nicely. We are seeing a lot of interest. You may have seen some press today on a Peterbilt event that was hosted. Lots and lots of truck fleets that are keen to figure how to do this, but even at that, there needs to be an order and delivery process. That is going to take some time. So I hope that gives you some comfort.

Okay, thanks; so you expect the backlog to grow from here?

It is going to build. Don't forget we don't really have a backlog. We repeated this I think every conference call, so everybody is aware. There is no such thing as an order backlog.

We are tasked with organizing the supply of natural gas components to a truck plant, but the truck plant doesn't actually give us a purchase order for every truck that they have seen an order for. We have got to deliver engines to build slots, and so our concept of who has ordered trucks and when they are going to get delivered has to be moderated by what the plant actually decides to do. And so that is -- in reality we have a pretty good visibility going forward a few weeks, but we don't have a purchase order backlog sitting on our desk.

Okay, thanks. And just lastly, I guess at what point roughly do you think the Ford sales will flow through the P&L for you guys in terms of whether it is Q2 or Q3, if there is any lag there? And then just on the Weichai heavy-duty launch early next year, any kind of rough idea in terms of how we should be thinking about the size or the trajectory of how profits could ramp there?

Sure. As you mentioned, we expect to launch the Ford 250/350 in the second quarter. We will have a handful of units, but we expect that to ramp up throughout the year.

And then for Weichai, as we mentioned, we have got a truck running around with our system on it. And we are expecting commercial launch. We will get a handful built later this year, but full commercial launch will be early 2013.

Okay, thanks. Then in terms of profit for those trucks, any kind of sense if that should increase versus current levels which seemed a little muted?

Well, I think -- if I understood the question, Rob, which is the current business is based on the spark-ignited systems sold through the joint venture. And as we continue to launch the HPDI or Westport HPDI technology, that product will be out toward the end of the year. And as Bill said, it's a handful of trucks. So the profitability and revenue we'll have to address just closer to the end of the year, closer to the HPDI product launch itself.

Ann Duignan of JPMorgan.

First on Cummins Westport, sales were up 86%. Units were up 94%, suggesting that average selling price was down. Should we take the current run rate as the go-forward run rate? Or was there something in the mix in the quarter?

I think it is probably just mix. It has always been a blend of international sales, particularly to Chinese bus manufacturers that are re-exporting to South America. That tends to take the average down versus North American shipments, of course, where the prices go up.

So I don't think you should draw too much from a single quarter. And then of course we are going to do interesting things to it as we launch the 12-liter engine as well. So product mix is primarily what is driving that statistical change.

It is not a bad run rate, I think from units maybe, if that was part of your question. I think that is obviously going to have some bifurcation. I think we have to, every quarter, say that our quarters are lumpy. But in terms of obviously future unit growth, the launch of the 12-liter engine in approximately 12 months, we obviously expect to tick up unit count at that point.

Thank you. That is helpful.

And then I think during the opening comments you reiterated your goal for 20% penetration of the North America heavy duty market. Could you just -- I find that there is a lot of confusion out there when I talk to investors about the size of the addressable market. Maybe it would be helpful if you could tell us what you believe the size of the addressable market in annualized volume is?

Sure. I think it is a bit silly to be forecasting 20% or 30% market penetration when we are at 0.1 or something. But I think we can look at industry comments from people like Navistar and Shell. I think Navistar's number a couple of weeks ago was 30% of the truck market. And they are talking about the entire Class 5 to 8 market in North America.

And I think the timeframe they were talking about, again I'm just looking back at their numbers, was by 2020. Now is that a smooth curve between now and then or is there a hockey stick? No one really knows.

I think what people are focused on is looking at how much is addressable today. Well, that's actually a pretty sizable number. Certainly what we have been talking about is high mileage trucks, anything that is kind of approaching 90,000 miles or more, and by the way, some of our customers are significantly higher than that, particularly the trucks that are running pretty much 7/24 with multiple drivers in places like the gas shale play.

So anybody who has got substantial mileage has a pretty good economic incentive today. And we think that that addressable market is somewhere between 20% and 25% of the Class 8 trucks. That's different from saying that 20% or 30% of the trucks that are on the road will be running on natural gas, which is what I think Navistar was referring to.

And I agree. So, you know, I want to be clear about what Westport's view is. I think you and I kind of agree. It is probably about -- the addressable market is probably somewhere close to 50,000 units per year.

Yes. For the heavy-duty market, also based on the economics and that we are seeing today -- I mean clearly we have an incremental purchase price compared to diesel, and certain market dynamics and sales models evolve over the next couple of years. Supply chains improve.

You can see the market size increase because we are taking that percentage based on number of mileage -- number of miles per year, and about 25% of the market is doing about 80,000 miles a year or more. So that just makes pure economic sense today. Ideally, the scalable market opportunity for that heavy-duty product increases over the next couple of years as all parts of the business start to mature, from the supply chain to product offering.

Sure. I appreciate that. But on the flip side, the higher mileage truck gets the likelihood that it will require a much broader nationwide infrastructure. Isn't that is kind of logical?

No (multiple speakers) certainly what we are targeting are the guys that are operating, for example Dick Heckmann operating in Haynesville shale. These trucks are very high mileage but it is on a very fixed road, and they've got relatively high fuel consumption because of the weight that they are hauling. So it really depends on the regional kind of patterns of truck use.

And we are targeting the guys that clearly can solve the infrastructure challenge now, and clearly have the economic incentive to go. And so those are typically the high-load regional haulers. True long-haul stuff is going to come as we get much more infrastructure buildout. But we are probably at least a year away from real long-haul capability.

Yes, I don't disagree with you at all.

And finally, then, on the renegotiated Cummins contract I thought it was interesting in that renegotiated document filed with the SEC that it does state that Cummins can enter the market on their own after -- in the 5th year after 5 years. Can you just address that? I'm just curious why that wasn't a discussion point on the conference call last (multiple speakers)

Actually I think what we said was that CWI had formerly had -- we can call it a right of first refusal. It wasn't exclusivity globally on road engines.

But really what we want to do with this is to say we don't want Cummins to compete with CWI. CWI is topping out at the 12-liter engine that we just announced. Actually I think technically we have cut it off at 13 liters, where there is a noncompete.

If Cummins wants to introduce engines -- and there are a couple of possible things that they might want to do in the future -- we said give us a first refusal in the joint venture. If the joint venture doesn't pick it up, Cummins can do it themselves.

There is a new platform that is being talked about and that would be either done through the joint venture or have a royalty paid. Outside what the joint venture is doing in North America, Cummins can either choose to have the joint venture do it or do it themselves. And we think that is a fair principle, given that Westport has no restrictions on what we do and we are competing with the joint venture ourselves.

So it was a fair trade-off. I think it makes sense for the joint venture to be adding value. And if it is adding value, then I have no doubt that Cummins will use the joint venture structure. And if it is not adding value, well, then what are we arguing about?

So I think it is a realistic approach going forward, and it will be several years before we see Cummins making those decisions anyway.

Okay. Thank you so much for the color. I do appreciate it.

Graham Mattison, Lazard Capital Markets.

Good afternoon. Wondering if you could just talk a little bit about your HD outlook right now. In the past you had given sort of the publicly announced orders, and you had given the [110] in the press release. Can you update on what the total number you have in the non-shipped publicly announced or quasi-backlog if you will? And then --

Well, we publicly announced 500 last year. We obviously just reported, I guess, figuring we had shipped 270 clearly against that. And then we have added at least 110 to the funnel for incoming orders, publicly announced orders in today's press release. I think obviously we have given a guidance number for 2012 and growth in heavy-duty is clearly a big part of that. We just -- it is difficult for us to give a specific number on that.

Actually that is very helpful on that. And then are any of those trucks that have been -- that you have publicly announced or talked about related to the Shell venture that you announced back in September?

Not at this time. We still expect further announcements with Shell.

And then could you just talk a little bit about the ramp in the SG&A, or I guess the G&A, and then the sales/marketing quarter over quarter and have you see that growing out or playing out over the next 12 to 18 months?

Sure. We have been ramping up our business to support our existing OEM relationships. We have talked about our relationship with Caterpillar, our sea & rail partnership with EMD, our presence over in Europe. And it is very critical that we have very close relationships with each of these OEM partners, and so we have been staffing up so we have essentially someone at their door at all times so we can address any needs.

And so we have had to bring a lot of headcount to support these relationships. And plus, we are out there trying to secure new relationships as well. So that is one of the biggest drivers of our SG&A and our selling expenses.

I will just add to that, not to contradict anything Bill is saying, but if you look at the product launch activities that we have been doing, it may not be obvious that a big part of what we need to do is get in front of the local dealers. We are working through the local channels for our OEM partners, and the Ford dealership channel is a good example. We have been training dealers.

There is a substantial workload in getting the product launch experience to the level that we want. And we have had a lot of enthusiasm, frankly, from heavy-duty trucks down through the passenger car side in getting not just basic concepts of how do I sell natural gas products, but specific mechanic training and guidance on parts and service maintenance. So, building up this channel expertise and enthusiasm has taken us a lot of effort, but on the other hand we think it's a very wise investment.

We want to get an exceptional customer experience with everybody, whenever they get delivery of their vehicles. We don't want to be caught short with an untrained dealer or the inability to supply parts or any of these things that are reasonably foreseeable. So that has been a big part of it.

I think that you can assume that there's substantial levels of activity and interest, and we would normally hope that that is going to translate into orders going forward.

But as you look forward is this -- is there a need for another step up in staffing and spend the way that we saw quarter over quarter?

I hope not. Somewhat like our engineering, if you look at the engineering history over the last couple of years, it also bulked up but hit a new plateau. And now we are hopefully able to just kind of circulate that resource as new projects come and go.

So there'll be some growth, but it is not going to be linear with revenue. In this case, we have just hit a very large bulge of product launch activity across a very broad product area. And so we have been very busy for the last -- I would guess 6 months and going forward. But I think that you are then going to see a much more modest ramp in that kind of expense.

Alright great. Very helpful. Thank you. I'll jump back in queue.

Rob Brown of Craig-Hallum.

Good afternoon. My question is on the (inaudible) you talked about a fair amount refuse units shipped in 2011. Just want to get your sense on what the refuse market could look like in 2012, either in terms of units or penetration rate.

Well, I think today we are probably sitting somewhere in the neighborhood of 20%, 25%. And I think by the end of this year, if we continue this growth, we could be easily at 30% market penetration of the fleet turnover every year.

And that is in 2012?

That's right. By the end of 2012 we could be at 30% market penetration.

Okay, and then just to follow up on your R&D expense comments. Did that include the new deal that you announced that I think was $12 million of R&D? And then is that sort of spread out over the next 2 years evenly?

Yes. A little bit of that is included in the current quarter R&D and we will incur that over the next several quarters.

Okay, but that wouldn't be additive to the current quarter run rate?

No, no, no, no. No. We do have some costs included in the current quarter.

Okay. Thank you.

Vance Edelson of Morgan Stanley.

Congrats on the strong growth. Just a few questions.

In terms of the R&D, sounds like there's not a lot of additional headcount required. But in terms of what the spend is aimed at, is it primarily related to known relationships that are ramping? Or is there significant component related to trying to attract new partners?

The easy answer is yes (laughter). I don't think there is any secret that we have been working with a broad range of new names. And a lot depends on the nature of those deals and how much work we are going to get outsourced back to us.

Each of our partner requirements is different and each of the programs in fact comes and goes. So it has been quite a juggling act to be responsive and have the resources that we need whenever a partner says, can you do this for us. And on going forward, I think that is going to be one of our critical value-adds, so it is not something that we want to avoid.

If there is a shortage of resources at a truck manufacturer, to do some basic truck integration and testing, and we can do that for them and accelerate, then we want to be able to step in. At the same time, you don't want to have a whole bunch of idle resource just waiting for the fire alarm to ring. So there has been some juggling.

We have built more capacity and we are building more capacity, as we said in the conference call last week, because we are seeing a lot of work coming our way. But at the same time, some of this we can manage through outsourcing partnerships of our own and shifting some of our testing to third parties and things like that. So it is a process.

We want to have the high-priority, most demanding technical work done in our facilities. We want to have some of the testing and maybe some of the durability testing more consistently outsourced. So that is really what the job with the management team, to anticipate that workload and balanced it intelligently. At the same time we want to get a lot of work done and hope our partners get their product portfolios ready for natural gas, which is what everybody is keen to do.

Okay, that makes sense. And regarding the F-series launch, anything you can tell us about early indications of interest? Has that been picking up at all as the launch date approaches? Do you have any orders in hand, as is often the case with a new vehicle launch?

The dealer teach-ins have gone really well. There is a lot of enthusiasm for the product, and I hope that we are being very conservative in our forecast of 500 units. It is just too early to say.

If it wasn't clear, this is a product being sold through the Ford dealers, so we have been training for dealers through the Ford system. It is ordered through the Ford system like any other vehicle, with an option. Hard to get a real handle on what the order flow is going to look like.

We have been targeting, frankly, the sophisticated fleets -- you know, customers like Encana, who want to use it in the gas fields. But we are seeing a lot of interest from government fleets. Particularly there is this 8-state consortium that put together an MOU to agree that they should be buying natural gas vehicles. This is typically states that are natural gas producers, so lots of interest there; lots of interest in retail, much to our surprise.

I think the option of running on gasoline or natural gas has caught people's attention. And the idea that it is a factory-quality, well-tested product seems to have given people some comfort. So we are getting a lot of inquiries. How that translates into orders, time will tell.

Okay. That's great. And one last question for me. The timing around Weichai, I know you said the official launch is really scheduled for early next year. But since we are still relatively early in 2012, any chance that things could progress faster than expected, such that you might be able to get a product out the door before year end?

I think that we'll have product out the door. I think from a material P&L impact we are just being, I think, realistic that it's -- you know we will have a handful, or whatever number there is, by the end of the year. But a real material ramp in sales would be a '13 event.

I think I'll just chime in and add to that (inaudible) on the -- look at the numbers from Weichai Westport. We are up 145%. Most of that, believe it or not, gets up a lot of people surprised. Most of that is LNG trucks.

And the trucking infrastructure is building faster in China than in North America. And of course the addressable market is significantly bigger. So, we are actually very encouraged by how fast things are moving in China to encourage the adoption of the LNG in the transport sector.

So, yes, we are doing our best. But as Bill said earlier, there is a launch process. We are trying to have a disciplined testing program. I know this isn't always the case in the Chinese market, but we are trying to set a standard of quality and performance, hot weather, cold weather testing.

So we are continuing to do the on-road testing with trucks and building up our capability. But the early signs are very encouraging for the demand for a product of this class and performance.

When it hits the market it will be substantially above anything else that is available in China for performance, quality, fuel economy, and emissions. So we think we will do very well with it.

And we made the point earlier, too, about the addressable market in North America. But actually we can I guess I apologize, Vance; we forgot to mention really that the market outside of North America is equally, if not greater in size, and that there is a fantastic opportunity.

You know that one engine platform that Weichai sold last year alone sold over 450,000 units in China. So, in terms of the addressable market for our HPDI product, international growth is far greater than just the opportunity alone in North America.

Europe is a little behind. We have been getting a lot of questions about Europe because there is some skepticism about their LNG availability and pricing. But, you know, we are not seeing that at all. I shouldn't say we have not seen it at all. We are seeing a lot of enthusiasm, a lot of interest.

There is substantial LNG supply around and people keen to sell it into the transportation markets. And again, I think all we can point to is the fact that we are looking at the differential. And diesel prices in Europe are high and going higher, and there is a lot of concern about oil availability. And they have, actually, pretty good access to LNG.

So I think we are going to see a strong market develop in Europe as well. It is just we are another year away from that. So it is probably 2 years out before we see significant LNG truck volumes in Europe.

That's great. That's it for me. Good luck.

Shawn Severson of JMP Securities.

Good afternoon. I was wondering if you could give a little color on how to think about the warranty expense going forward. I know you gave some color on the negative impact over the short term on the gross margin, but how did that evolve from there? I mean is it a question of units and time? Or just give us some idea of when we can expect that to come back into line and see margin expansion, both at CWI and in the HD product.

Yes, I think you have touched on both of them. It is volume and time. It usually takes several quarters to get through and shoot all the bugs out of a new engine.

I think a great example is when we launched the joint venture, launched the 8.9 meter. Our margins were in the low 20s and now we are realizing healthy margins at a mature level. And we would expect to come down that same type of curve for our 15-liter, the HPDI system, over the next several quarters and -- however, we will continue to monitor it. And we expect that could have an impact, positive impact, on our margins this year going forward.

And then just a question on the high horsepower market. I mean, I know it is very early, but what is your best guess at this stage of how that will develop for you? I mean it is going to be similar joint venture arrangement to technology agreements that you had on the truck engine side? Or do you think there will be something different about how the market evolves?

Yes, good question. Let us know if you have got any good ideas (laughter). I mean, I'm not trying to be silly here. There's a smaller number of players, but these are much more valuable markets.

So let's start by saying that we have met everybody. Everybody in the industry is enthused, [that] there's clearly differences of opinion going forward over what is the right approach, the right business model, the right nature of the partnership. So I think there is going to be a range of relationships based entirely on the preferences and the expertise of our partners.

So I think we will see some technology license arrangements where we provide services and technology, all the way maybe to a full-blown joint venture. So I don't want to take anything off the table.

What we are, I think, confident in saying is that we want to add value to our partner. So if you look at the guys we have announced we are working with -- Caterpillar, EMD -- EMD is now a division of Caterpillar, but they are quite different operations and companies.

I think we are going to see different relationships between the mining industry and the rail industry, just because the nature of those businesses are quite different and the product cycles are different within one company. So there's an example.

I think as you go around the world, we are seeing interest in China and India on high horsepower. We are seeing and interest in the marine industry, a lot of interest in Europe and North America.

I think in the short term what we would be most surprised at has been kind of the robust response from the rail industry globally, and some of that is because the infrastructure challenges is relatively straightforward. We can talk about tender cars for fuel. We can move fuel around through the rail network itself, and these are such high fuel use applications that it justifies a pretty high level of investment.

We are also seeing interest because of the technology changes that are coming as we see new environmental controls around the world in the industries. So all of those factors, I think we are seeing urgency about getting product to market, which is a good thing. And we are talking to, as I said, just about everybody in the industry about how they can play with natural gas.

How this plays out in terms of contracts and return to Westport, we are going to work with our partner to get things that are win-win for both of us.

And just a quick follow-up to that. If you were to look at it from a technology challenge standpoint and say, like, tomorrow you had full dedication, full resources and a partner who went after this, you know, after this market in particular, let's say, the locomotive market -- what is the development time for a product there? I mean is it 2 years, 4 years? I mean you have -- you obviously experienced this through the truck engine markets, but what is the best guess as far as development time if everybody was 100%?

Well, certainly (inaudible) we can point to one very public example, which is the EMD, CN Rail, Westport consortium and Gaz Metro where we expect the engine to be running in '13 and the train running in '14. So to answer your question, I guess really 2 to 3 years to get a train running from the start.

And in terms of the commercialization rollout from that point, I think it is just a function of making sure the OEM is on side and on board all the way. But it's -- I guess the overriding message is it is not logarithmically higher or longer than the heavy-duty truck engine business.

Thank you.

Yes, I know it is going back a ways, but in fact the very first agent we did on HPI technology was a 60-liter engine. So big engines are actually in some ways easier than small engines, just lots more fuel.

But I think the other color I can give you on Darren's answer is that what we have seen in that CN project is a shift from what amounted to a demonstration project, a feasibility, a proof of concept to something that is much closer to a commercial product. So certainly the intent now is, as Darren says, is to have an engine running and a train running is -- what we are testing out is the commercial viability of a solution that will be pretty close to market-ready, we would hope.

Eric Stine of Northland Capital Markets.

Just to follow up on the OEM agreements, with the one you just signed, HPDI, you were pretty clear that was one of your top priorities. Any thoughts on areas we might see next or what you will focus on?

I think we are focused on the list of everybody that is not a partner (laughter). And on -- I know it sounds a bit egregious, but it is true. We have met with everybody, both light-duty and heavy-duty manufactures.

I think everyone is realizing that they need a natural gas strategy, and certainly you have only seen a few of them publicly announce a natural gas strategy. So, yes, we are working with everyone (inaudible) strategy. I am not saying we are going to get 100% and we are not going to see everybody.

But there is certainly lots of activity and we are certainly hopeful that we'll see some new names. High horsepower, of course, is another area that is very lively right now.

Okay, I thought I would give it a shot if I could get some specifics. But fair enough (laughter). Maybe just turning to the heavy-duty segment, just curious if you could talk about the progress made with build slots and any thoughts. Is it becoming easier as Peterbilt and Kenworth get more comfortable, just what's going on in the industry?

Yes, well, I think that has been very heartening. As I said, there was a Peterbilt public event this morning where Peterbilt said they will be building 2000 natural gas trucks this year, which is obviously a lot more than last year.

So I think that people are seeing the rise in interest in their own customer base and the opportunity to capture those new customers. So it's I think it is across the industry that we are going to see recognition of the opportunity, and that means we will be allocating product and build slots to it.

Okay, and last one for me. Just wondering thoughts on the ISLG's inclusion with the 2 international trucks. Is that something that you view as impacting '12? Or should we think of that more as a 2013 event?

You are talking about the 8.9 liter announcement?

Yes, 8.9 liter and the 2 international trucks coming out.

You'll see those shipping this year.

Okay. Some this year and well -- obviously ramping in 2013.

Yes.

Okay. Thank you.

John Quealy of Canaccord Genuity.

Just 2 questions. First and I don't know if I missed this. On the LD outlook for '12 can you walk us through a little bit based on what else is to come on an annualized basis from Emer and AFV? And if you could just give us a little bit of a walk as an indication of what '12 will look like apples-to-apples on LD.

Well, I think for next year -- first of all, we only saw about 6 months this year from Emer from when we acquired them in July through the end of December. So next year we are going to see a full year of financial results from Emer but also, too, AFV which we just acquired in late October this year. And so we'll see another full year from AFV. So those are going to be big drivers for increasing or the expected increase in our revenues for the light-duty business in calendar '12.

Bill, you did about [34] in calendar '11. We are just going to sort of annualize that, almost double that for apples-to-apples?

[It was 31. Yes 31]. And so, yes, I think that is a fair assessment. But also too is -- we have talked about we have at the Ford F-250/350 launch, and we expect that will contribute about $5 million in revenues in calendar '12 as well. So that is going to be additive.

Got you. Okay. And then lastly in the offering -- post-offering documents you talked about potential uses of cash and we are talking about heavy horsepower here. Can you just talk about what we should be thinking about for expectations in the next 12 to 15 months about cash deployment relative scope? If we go high horsepower in a bigger way, how much does that necessitate as an investment up front to jumpstart that, that type of scenario?

Well, I think you have seen us make some of those jumpstart investments. So we are doing R&D today particularly in mining and in rail. That has been going on for some time which is -- I'm not sure if Bill actually gave you the full numbers for the year, but it has been a substantial part of the -- kind of the unsupported investment that we have been making on R&D.

I think what you should assume is that is going to continue at about the current rate until we get some clarity on commercial products. And at that point we will either be investing significantly in some sort of joint venture, or we will be seeing something more at other end of the scale, a Volvo-like deal where we are being paid to develop a product and seeing a technology royalty. I think we commented on that a bit earlier.

I think you are going to see a mix. We are expecting multiple high horsepower programs to kick off with multiple partners, and each of those is going to be slightly different.

So it is very helpful to have the balance sheet we have, because it means that we can respond to any circumstance with some credibility, and respond quickly to our partners' requirements. So I think we're in good shape and we'll see how this plays out over the next 12 months.

Colin Rusch of ThinkEquity.

Colin is on a plane, so you got Noah. Just a quick question. If I have my math right, I guess ASP's for heavy-duty were about $56,000, if that's right. And can you talk a little bit about the product mix and specifically one-tank versus 2-tank solutions and (multiple speakers).

Yes, I think we said our single tanks are low $50,000s, high $40,000s. Our dual tanks are about $60,000-ish range. And what we're seeing is a significant portion of our orders are going to be dual-tank orders, and so our ASP's have been skewed a little bit. And we expect that to be a little bit skewed in the near term based on what we see.

So sort of ticking up towards the latter half of 2012?

Yes.

And can you talk a little bit? You know we are hearing a lot of encouraging commentary from Chart and your comments before about growth with Weichai. Can you talk a little bit about the economics of the LNG infrastructure in China and how that might be playing into a favorable fuel spread?

Yes, it's again something we could spend a lot of time on. And certainly I would encourage you to go to China, and we'll be happy to tour you around and see what's up.

There's a lot of misconceptions. First one is that there's a much higher price for natural gas. In fact natural gas is being landed. LNG is being landed at pretty attractive prices compared to the price of diesel fuel.

But we are also seeing a lot of action in people liquefying stranded gas or using coal bed methane. And a lot of the development of the infrastructure is in the far west, where China's resource industry is based. And so again, the differential between natural gas and diesel fuel is substantial.

But we also have the factor of the Chinese government has a little bit of a stick in saying this is what we're going to do, and they are building infrastructure and encouraging people to use natural gas because it is more available domestically, and you know, and trying to recognize their vulnerability on oil imports. So I think we are seeing a combination of all of those things.

We are still talking a few thousand trucks in a market that last year was a couple of order of magnitudes bigger than that. So I think it is great that we are seeing such rapid growth, but we still have a long way to go before we see market saturation there.

Rupert Merer of National Bank Financial.

You talk a little bit about development of new platforms for CWI. Should we look for new engine platforms there once the ISX12G is completed? And if so, what do you think a new platform could look like?

I think that is probably something we'd better let you wait and see. You know we have got a pretty good product line in the mix now. You know, at the same time I think it's probably reasonable to expect we will look at the bottom end of the product line next for a refresh.

But look at Commons product line in that midrange, and we want to see a natural gas offering depending on the market demand. So that is really what the CWI is up to. Their focus for the last 3 years has been this 12-liter product.

And that's, I think, going to be -- we certainly expect that it's going to be the main focus for the next little while anyway. But as we look at opportunities going forward for the joint venture, clearly it is going to depend on what the market opportunity looks like and whether the joint venture sees a competitive advantage.

Okay, great, and when you talk about a product refresh, you are talking about the B and C gas engines there?

Well, the C gas has really been supplanted by the ISLG. You know, I think that there is a pretty clear product path forward in that 6-liter to 9-liter path where I think the ISL has got substantial life left in it, the 12 is obviously brand-new. And we need to take a look at the bottom end.

What's the typical life of a platform?

You'd really have to ask Cummins that. It really depends on the market. But these are pretty new products and we think they have got pretty good life throughout the ten-year period we are looking at with the joint venture.

Michael Willemse of CIBC.

Just a follow-up question on Weichai. I think you mentioned this a couple of quarters ago. What should we think about as far as ASP's on the heavy-duty engines at Weichai relative to North America?

What we have been saying is that the ASP it is a bit of a range right now because it's an OEM supplier. We have to be mindful of certain disclosures.

But the ASP range, and again just to apologize almost in advance, is actually between about $10,000 or $15,000 US and $40,000. I think as we get closer to product launch we will be able to tighten the range of the goalposts, if you will. But that is probably the best we can do right now I think in terms of ASP.

And then really, off of the ASP from on engine and off engine, we expect to generate an after-tax or net profit in the range of a few thousand or several thousand dollars. So, again, I think as we get closer to launch we should be able to tighten up the range.

So, lower than North America but not 10% of North America?

Right.

Okay. And then, Bill, I think you mentioned on the heavy-duty engine side, you are expecting to hit 30% gross margin once you hit kind of a good commercial run rate. So would that be once the engines are being manufactured in Jamestown at the Cummins facility?

Yes, that will definitely help. I think that we can -- there are some fairly substantial cost savings by transitioning the engine assembly to the Cummins facility.

Okay, and on heavy-duty engine shipments for this year, I know, Darren, you had mentioned several times 500 to -- sorry, 500 to 900 was a good number. Is that still a decent range?

Well, just to clarify, we actually can't give numbers. I think the sell-side community has been in that range for a while. That has always just been -- that is the only thing we can say, is where the sell-side community is.

Obviously, look, we have increased our guidance on an aggregate level. We haven't provided individual business unit guidance, but whether -- I guess the only answer we can provide you in terms of the heavy-duty business growth in North America is honestly what you guys come out with over the next few days and being able to reconcile with that.

Okay. Understood. And then just one more question just on the revenue guidance for 2012.

If you look at kind of quarterly momentum in sales, it would suggest that in the March quarter things are kind of stabilizing versus the December quarter. And I know the last couple of quarters the guidance kind of implied that, but things kind of moved ahead of that.

I understand the markets moving very quickly so it is hard to make these forecasts, but I mean is there anything suggesting quarterly momentum slowing? Or, you know, it sounds like from the commentary it might be the other way around.

I will take that one. I don't think we can just take the full year and average it out throughout. We will probably see some ramp up throughout the year as new products come online, for example the Ford 250/350 starting to launch in the second quarter and starting to ramp up.

So it might be a little bumpy throughout the year, but we are -- internally we are looking at the full year. And that is how we -- based on our budgeting forecasting process, that is how we see the full year coming out.

Matt Gowing of Mackie Research Capital.

Congratulations on all the progress over the quarter.

Thanks.

Found your comments very interesting and helpful with respect to the addressable market in the US. I'm wondering if you'd make some kind of parallel comments as they relate to Westport Weichai in China, and maybe comment on what penetration Weichai currently has with their existing natural gas engine over there, and maybe how that penetration could change once Westport Weichai has had limited this new -- your spark ignition technology. Thanks.

Yes, I think we can just point you at some basic numbers. I am looking at Bill here to see if he has got the actual unit count for Weichai Westport. 8000, does that ring a bell?

A little over 8400 units.

So, 8400, up 150%. In a Chinese market you know there are commercial vehicle market over 1 million units a year. Weichai themselves are the biggest player, and in the truck business, I think their market share is 70%, in that range. So we are still a tiny fraction -- call it 1% penetrated for the current flow share in the trucking industry in China.

Now, they turn their products over more rapidly. In other words, the trucks wear out much more quickly, which is partly why the engine volumes are so high. And over time we think that is going to get a little more westernized and you are going to see longer life and longer duty cycles, and that will shrink market turnover a bit.

But in general, we are seeing the same pattern there as we're seeing here. I think the high-use trucks and the ones that are closest to natural gas are the ones that are going to go first. But there's no reason not to expect that to spread very rapidly as prices come down and as the availability of the infrastructure goes up.

So the addressable market in China might be 10 or 20% today, which is still couple orders of magnitude bigger than we have got room for now. So we've got lots of room to grow. The challenge will be as we start to see 20% market penetration, can we get up to 50%.

So I think the same challenges that we have in North America will see it replicated in China with some of the different factors that I mentioned. You are going to see different attitudes from the state-owned oil companies. That is pretty clear. And we are going to see different pricing dynamics in China again because of the state control of energy.

Great, and so the introduction of this new product line that you said will really be commercially available in 2013, how quickly will that have an impact on Westport Weichai's sales? Will that be pretty much immediate and will it be a material impact to the volumes?

Yes, we certainly hope it will be that way. It is going to ramp like anything. But much like we are seeing with the ISX12 with Cummins Westport, these are brand-new large markets that are completely opening up. So we certainly hope to see rapid market penetration, and that is inevitably going to pick up the growth rates up.

And just a question on the natural gas infrastructure over there. What companies are building out that fueling infrastructure? Is it the government? Or can you point us toward some private companies that are investing there?

Yes, I think if you Google them, particularly if you speak Mandarin, you will find lots of action around LNG in China. It is a mix of the big state-owned companies and a number of private ventures that have jumped into the fray.

I know Chart has been talking about some of their business there. Lots of players who are supplying LNG components into that Chinese market, so you can kind of track the business activity just by seeing what those suppliers are saying. And it has been substantial this year.

Okay, great, and just one last question for me. You said last quarter that Westport HD would be reaching that critical 300-unit per quarter number sometime in 2012. Can you give us a sense of that is going to be sometime toward sometime toward the back end of the year or potentially sooner than that?

Well, I think we should get some comfort from the fact they hit 170 this quarter, which is a lot closer to 300 than 85. So we are on that trajectory. That said, we want to caution people there is a ramp, there is a lead time. We are building infrastructure.

So I think it would be safer to focus on the back half of the year. We are getting capacity where we can respond to demand. But we have to wait for the infrastructure to appear before we can deliver trucks.

Great. Thanks for the color.

Michael Willemse.

Just another follow-up question on CWI. I think you mentioned that margins should decline to 30%, 35% once the new 12-liter engine is introduced. So is it safe to say that is a '12, 2013 kind of Cummins as that's when the engine will be introduced? Or is there anything moving the margin around 2012?

I think that is going to have to sit in the category of wait and see. You know it's --there's always product mix. There's always pricing. There's always competitive response and there's always warranty to think about in this mix.

So I think our long-term advice for the past few years has been -- don't assume CWI is going to maintain these spectacular margins forever. We are targeting 30% to 35%. We think that is fair and reasonable and long term. In the short term it is not a bad thing to be seeing a period of high margin.

In the near-term as we get product launch out there, yes, you actually should see an averaging down. But we don't think that is a bad thing because it says we are going to be addressing a completely new market. So hopefully the revenue rise is going to compensate us for that.

But in terms of trying to model some average gross margin from the joint venture, we think we are at a high water mark now and it will be lower going forward. Hopefully with significant growth in the actual dollars that are coming in.

Okay. That's fair. Thank you.

There are no more questions at this time. I will now turn the call back over to Darren Seed for concluding comments.

Thank you very much everyone for attending and I guess we'll see you on the next Q1 conference call expected in early May.

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day.